Torro's construction company wants to expand its operations. To do this, the company will need to purchase a new excavator. There are several possible options for the new purchase. All options will have a 10-year life with no salvage value. The company has a 21% tax rate and a cost of capital of 9%. The following options have been provided.
$\bullet$The 130G will provide a consistent annual operating cash inflow of $110,000 per year for the 10 years.
$\bullet$The 245G will provide annual operating cash inflows for years 1 and 2 of $170,000. Years 3 - 7 will drop to $130,000 per year, and years 8 - 10 will drop to $90,000 per year.
$\bullet$The 470G will have no cash flows in year 1, $170,000 in years 2 - 8, and $220,000 in year years 9 and 10.
Instructions
a. Calculate the simple payback period for each option.
b. If Torro's will only accept investments with a payback period of 8 years or less, would any of the options work for the company?
c. What are the total cash flows for each of the options over the 10-year life? Are these amounts taken into consideration when using the payback period?

Question

Torro's construction company wants to expand its operations. To do this, the company will need to purchase a new excavator. There are several possible options for the new purchase. All options will have a 10-year life with no salvage value. The company has a 21% tax rate and a cost of capital of 9%. The following options have been provided. 
 $\bullet$The 130G will provide a consistent annual operating cash inflow of $110,000 per year for the 10 years.
$\bullet$The 245G will provide annual operating cash inflows for years 1 and 2 of $170,000. Years 3 - 7 will drop to $130,000 per year, and years 8 - 10 will drop to $90,000 per year.
$\bullet$The 470G will have no cash flows in year 1, $170,000 in years 2 - 8, and $220,000 in year years 9 and 10.
Instructions
a. Calculate the simple payback period for each option.
b. If Torro's will only accept investments with a payback period of 8 years or less, would any of the options work for the company?
c. What are the total cash flows for each of the options over the 10-year life? Are these amounts taken into consideration when using the payback period?

Quizplus · Accepted Answer

The Answer of Torro's construction company wants to expand its operations. To do this, the company will need to purchase a new excavator. There are several possible options for the new purchase. All options will have a 10-year life with no salvage value. The company has a 21% tax rate and a cost of capital of 9%. The following options have been provided. 
 $\bullet$The 130G will provide a consistent annual operating cash inflow of $110,000 per year for the 10 years.
$\bullet$The 245G will provide annual operating cash inflows for years 1 and 2 of $170,000. Years 3 - 7 will drop to $130,000 per year, and years 8 - 10 will drop to $90,000 per year.
$\bullet$The 470G will have no cash flows in year 1, $170,000 in years 2 - 8, and $220,000 in year years 9 and 10.
Instructions
a. Calculate the simple payback period for each option.
b. If Torro's will only accept investments with a payback period of 8 years or less, would any of the options work for the company?
c. What are the total cash flows for each of the options over the 10-year life? Are these amounts taken into consideration when using the payback period?

Torro's Construction Company Wants to Expand Its Operations ∙\bullet∙ The 130G Will Provide a Consistent Annual Operating Cash Inflow

Torro's Construction Company Wants to Expand Its Operations $\bullet$ The 130G Will Provide a Consistent Annual Operating Cash Inflow