CrimsonCompany is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: $$\begin{array} { l r }
\text { Decreased waste } & \$ 150,000 \
\text { Increased quality } & 450,000 \
\text { Decrease in operating costs } & 300,000 \
\text { Increase in on-time deliveries } & 100,000
\end{array}$$ The system will cost $10,000,000 and will last eleven years. The company's cost of capital is 9 percent. What is the payback period for the computerized manufacturing system?

Question

CrimsonCompany is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: $$\begin{array} { l r } 
\text { Decreased waste } & \$ 150,000 \
\text { Increased quality } & 450,000 \
\text { Decrease in operating costs } & 300,000 \
\text { Increase in on-time deliveries } & 100,000
\end{array}$$ The system will cost $10,000,000 and will last eleven years. The company's cost of capital is 9 percent. What is the payback period for the computerized manufacturing system?

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual after-tax cash benefits/savings. The total annual savings are $150,000 + $450,000 + $300,000 + $100,000 = $1,000,000. The initial cost of the system is $10,000,000. Therefore, the payback period is $10,000,000 / $1,000,000 = 10.00 years.

CrimsonCompany Is Considering the Purchase of a Computerized Manufacturing System