Question

Two equivalent pieces of quality inspection equipment are being considered for purchase by Square D Electric. Machine 2 expected to be versatile and technologically advanced enough to provide net income longer than machine 1. Assume i= 10%. Select the best machine based on the discounted payback method. ( need more steps )

solution
Machine 1

0=-12,000+3000(P/A,10 %,np)
np==5.37 years

Machine 2

8,000 Machine-2

0=-8,000+1000(P/A,10%,5)+3000(P/A,10%,np-5)(P/F,10%,5)= Np= 7.7years

Then choose machine 1

Answer 1

Year	Machine 1	DF	PV	Cumulative NPV	Machine 2	PV	Cumulative NPV
0	-12000	1	-12000	-12000	-8000	-8000	-8000
1	3000	0.9091	2727.3	-9272.7	1000	909.1	-7090.9
2	3000	0.8264	2479.2	-6793.5	3000	2479.2	-4611.7
3	3000	0.7513	2253.9	-4539.6	3000	2253.9	-2357.8
4	3000	0.683	2049	-2490.6	3000	2049	-308.8
5	3000	0.6209	1862.7	-627.9	6000	3725.4	3416.6
6	3000	0.5645	1693.5	1065.6

DF = 1/(1+0.1)^n , 0.1 = 10 percent interest rate, n = no of years

PV = DF*cashflow

Discounted pay back period for machine 1= 5+(627.9/(627.9+1065.6) = 5.37 years

Discounted pay back period for machine 2= 5+(308.8/(308.8+3416.6) = 5.08 years

Machine 2 has lower discounted pay back period than machine 1