Question

Jubail Corporation has just purchased a new CAD Machine for $35,000 to replace old machine that had a salvage value of $ 15,000. The useful life of the new machine is 10 years. The machine generates annual sales of $10,000 and has annual maintenance cost of $5,000. Calculate the Payback period using Discounted Payback method, If Jubail's MARR (minimum acceptable rate of return) is 15%:

A. 8.12 Years

B. 6.57 Years

C. 8.57 Years

D. 11.05 Years

Answer 1

Net cost of machine = 35000 - 15000 = 20000

Net income per year = 10000 - 5000 = 5000

Let discounted payback period be n yrs, then

5000*(P/A,15%,n) = 20000

(P/A,15%,n) = 20000 / 5000 = 4

((1 + 0.15)^n-1)/(0.15 * (1 + 0.15)^n) = 4

((1.15)^n-1)/(0.15 * (1.15)^n) = 4

((1.15)^n-1) = 4*(0.15 * (1.15)^n)

((1.15)^n-1) = 0.6 * (1.15)^n

1.15^n = 1 / (1 - 0.6) = 2.5

taking log both sides

n = log 2.5 / log 1.15 = 6.556 yrs ~ 6.56 yrs ~ 6.57 yrs (option B)

option B is correct answer