Question

Management at Wholesome Brands has decided to modernize its west coast distribution operations and is evaluating...

Management at Wholesome Brands has decided to modernize its west coast distribution operations and is evaluating two investment opportunities. The first alternative is to invest in new warehouse equipment with a cost of $149,400. The new warehouse equipment is expected to result in a cost savings of $36,000 in labor costs per year for 7 years. The second alternative is to invest in automation for the delivery trucks at a cost of $234,000. The delivery truck automation is expected to result in a cost savings of $52,000 per year for the next 5 years.

Required:

  1. Determine the payback period for each alternative.

  2. Which investment alternative should Wholesome Brands move forward with if their decision was based solely on the payback approach, and why?

  3. What are two shortcomings of the payback approach?


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