Question

4. Your company has a 3 year pay-back rule for investments less than $20,000. You are...

4. Your company has a 3 year pay-back rule for investments less than $20,000. You are analyzing a new forklift which will cost $11,265. This new forklift will replace a much slower and less efficient model and should result in after-tax savings of $3,825/year. A. What is the payback period? B. If your estimates are correct, should your company buy the new forklift?

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Homework Answers

Answer #1

Answer:

A. 2.95 Years

B = Yes

Note:

A. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2+(3615/3825)

= 2.95 Years

Year Investment Cash Inflow Net Cash Flow
0 -11,265.00 -    -11,265.00 (Investment + Cash Inflow)
1 -    3,825.00 -7,440.00 (Net Cash Flow + Cash Inflow)
2 -    3,825.00 -3,615.00 (Net Cash Flow + Cash Inflow)
3 -    3,825.00 210.00 (Net Cash Flow + Cash Inflow)

B. Since the Actual Payback is within the maximum allowable payback period, the forklift can be bought.

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