Question

Lila Limited is considering the purchase of a new machine for its manufacturing facilities. The purchase of the machine is expected to reduce operating costs.

Presented below is the relevant cost and operating information relating to the new machine:

Initial Cost	$240262
Installation Costs	$22052
Useful Life	11 years
Expected annual cash operating savings – years 1-11	$56092
Additional annual cash fixed costs	$12802

Assuming Lila Limited uses the payback method to evaluate capital expenditures, what is the payback period for this expenditure?

Select one:

a. 4.68 years

b. 6.06 years

c. 3.89 years

d. 5.55 years

Plato Ltd. is considering one of two different projects. Cash flow data for these projects are as follows:

	Year	Project CR	Project DR
	0	($60187)	($92988)
	1	21594	16764
	2	31834	40283
	3	4864	46958
	4	9932	11000

Assuming the company’s objective is to minimize the payback period, what is the payback period of the project that should be accepted?

Select one:

a. 2.19 years

b. 3.77 years

c. 3.19 years

d. 2.77 years

Answer 1

1
Payback period for this expenditure=(240262+22052)/(56092-12802)= 6.06 years
2
Year	Project CR	Cumulative cash flows	Project DR	Cumulative cash flows
0	-60187	-60187	-92988	-92988
1	21594	-38593	16764	-76224
2	31834	-6759	40283	-35941
3	4864	-1895	46958	11017
4	9932	8037	11000	22017
Payback period Profject CR=3+(1895/9932)= 3.19 years
Payback period Profject DR=2+(35941/46958)= 2.77 years
Option D is correct