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  • P10-2 Payback Comparisons

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    Intan N T
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    Machine 1 costs $25,000 with annual cash inflows of $6,500, resulting in a payback period of 3 years and 6 months. Machine 2 costs $75,000 with annual cash inflows of $9,500, resulting in a payback period of 7 years and 5 months. Only Machine 1 meets the company's maximum payback requirement of 5 years. Therefore, the firm will accept Machine 1, even though Machine 2 generates higher total cash flows over its longer lifespan.

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    Machine 1 costs $25,000 with annual cash inflows of $6,500, resulting in a payback period of 3 years and 6 months. Machine 2 costs $75,000 with annual cash inflows of $9,500, resulting in a payback period of 7 years and 5 months. Only Machine 1 meets the company's maximum payback requirement of 5 years. Therefore, the firm will accept Machine 1, even though Machine 2 generates higher total cash flows over its longer lifespan.

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    4 views1 page

    P10-2 Payback Comparisons

    Uploaded by

    Intan N T
    Machine 1 costs $25,000 with annual cash inflows of $6,500, resulting in a payback period of 3 years and 6 months. Machine 2 costs $75,000 with annual cash inflows of $9,500, resulting in a payback period of 7 years and 5 months. Only Machine 1 meets the company's maximum payback requirement of 5 years. Therefore, the firm will accept Machine 1, even though Machine 2 generates higher total cash flows over its longer lifespan.

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    © All Rights Reserved
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    1.

    P10-2 Payback comparisons

    A. Machine 1: $25,000 ÷ $6,500 = 3 years, 6 months


    Machine 2: $75,000 ÷ $9,500 = 7 years, 5 months
    B. Only Machine 1 has a payback faster than 5 years and is acceptable.
    C. The firm will accept the first machine because the payback period of 3 years, 6 months is
    less than the 5-year maximum payback required by Colorado Cleaning.
    D. Machine 2 has returns that last 15 years while Machine 1 has only eight years of returns.
    Payback cannot consider this difference; it ignores all cash inflows beyond the payback
    period. In this case, the total cash flow from Machine 1 is $39,000 ($60,000 − $21,000)
    less than Machine 2.

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