You are given the following financial data about an assembly machine to be implemented at a company: Investment cost at year 0 (n=0) is $22,000 Investment cost at the end of the first year (n=1) is $18,500 - Useful life: 15 years - Salvage value (at the end of 15 years): $7,000 - Annual revenues: $18,000 per year Annual expenses: $5,000 per year Assuming the first revenues and expenses will occur starting from the end of year 2, determine the conventional (non-discounted) payback period.
You are given the following financial data about an assembly machine to be implemented at a company: Investment cost at year 0 (n=0) is $22,000 Investment cost at the end of the first year (n=1) is $18,500 - Useful life: 15 years - Salvage value (at the end of 15 years): $7,000 - Annual revenues: $18,000 per year Annual expenses: $5,000 per year Assuming the first revenues and expenses will occur starting from the end of year 2, determine the conventional (non-discounted) payback period.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:You are given the following financial data about an assembly machine to be implemented
at a company:
- Investment cost at year 0 (n=0) is $22,000
- Investment cost at the end of the first year (n=1) is $18,500
- Useful life: 15 years
- Salvage value (at the end of 15 years): $7,000
Annual revenues: $18,000 per year
- Annual expenses: $5,000 per year
Assuming the first revenues and expenses will occur starting from the end of year 2,
determine the conventional (non-discounted) payback period.
Expert Solution
Step 1
Payback period: It represents the time period required for recovery of initial investments made in the project i.e., it is the period within which the total cash inflows from the project equals the cash outflows (initial investment) in the project.
Data given:
| Year | Investment ($) | Annual Revenue ($) | Annual Expenses ($) | Salvage Value ($) |
| 0 | -22000 | |||
| 1 | -18500 | |||
| 2 | 18000 | 5000 | ||
| 3 | 18000 | 5000 | ||
| 4 | 18000 | 5000 | ||
| 5 | 18000 | 5000 | ||
| 6 | 18000 | 5000 | ||
| 7 | 18000 | 5000 | ||
| 8 | 18000 | 5000 | ||
| 9 | 18000 | 5000 | ||
| 10 | 18000 | 5000 | ||
| 11 | 18000 | 5000 | ||
| 12 | 18000 | 5000 | ||
| 13 | 18000 | 5000 | ||
| 14 | 18000 | 5000 | ||
| 15 | 18000 | 5000 | 7000 |
Total cash outflow=-$22000-$18500
Total cash outflow=-$40500
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