Question

Cash Payback Period, Net Present Value Analysis, and Qualitative Considerations The plant manager of Shenzhen Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $375,000. The manager believes that the new investment will result in direct labor savings of $75,000 per year for 10 years.

Present Value of an Annuity of $1 at
Compound Interest |
|||||

Year |
6% |
10% |
12% |
15% |
20% |

1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |

2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 |

3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 |

4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 |

5 | 4.212 | 3.791 | 3.605 | 3.353 | 2.991 |

6 | 4.917 | 4.355 | 4.111 | 3.785 | 3.326 |

7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 |

8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 |

9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 |

10 | 7.360 | 6.145 | 5.650 | 5.019 |
4.192 |

**a.** What is the payback period on this
project?

years

**b.** What is the net present value, assuming a
10% rate of return? Use the table provided above. Round to the
nearest whole dollar.

Net present value | $ |

Answer #1

**SOLUTION**

A. Cash payback period is the approach used to know the period what a new projects takes to get back the cash which had been invested.

Cash pay back period = Initial cost / Annual net cash inflow

= $375,000 / $75,000 = **5 years**

B. Net present value is today's value of future cash inflows at the rate of return which is acceptable by the company, which is compared with the present value of cash outflow.

Particulars |
Cash inflows |
Annuity factor @10% |
Present value of cash flow |

Cash inflows | 75,000 | 6.145 | 460,875 |

Cost of automated assembly equipment | 375,000 | ||

Net present value of equipment |
85,875 |

Cash Payback Period, Net Present Value Analysis, and Qualitative
Considerations
The plant manager of Shannon Electronics Company is considering
the purchase of new automated assembly equipment. The new equipment
will cost $168,000. The manager believes that the new investment
will result in direct labor savings of $56,000 per year for 10
years.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
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1.626
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Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
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3.465
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3.037
2.855
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5
4.212
3.791
3.605
3.353
2.991
6
4.917
4.355
4.111
3.785
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5.582
4.868
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6.210
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Year
6%
10%
12%
15%
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Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
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1.528
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12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
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1.833
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