Sunderland Wood Creations
Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe.Information on the existing lathe and the computer-operated lathe follow:
$\begin{array}{ll}
\text { Existing } & \text { Computer-operated } \
\underline{\text { lathe }} &\underline{\text { lathe }}
\end{array}$
$\begin{array}{lcc}
\text { Cost } & \$ 100,000 & \$ 300,000 \
\text { Accumulated depreciation } & 60,000 & 0 \
\text { Salvage value now } & 20,000 & \
\text { Salvage value in 4 years } & 0 & 60,000 \
\text { Annual depreciation } & 10,000 & 75,000 \
\text { Anmual cash operating costs } & 200,000 &50,000\
\text { Remaining usefull life } & 4 \text { years }& 4 \text { years }
\end{array}$

Refer to Sunderland Wood Creations.What is the payback period for the computer-operated lathe?

Question

Sunderland Wood Creations
Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe.Information on the existing lathe and the computer-operated lathe follow:
                                                                   $\begin{array}{ll}
\text { Existing } & \text { Computer-operated } \
\underline{\text { lathe }} &\underline{\text { lathe }}
\end{array}$
$\begin{array}{lcc}
\text { Cost } & \$ 100,000 & \$ 300,000 \
\text { Accumulated depreciation } & 60,000 & 0 \
\text { Salvage value now } & 20,000 & \
\text { Salvage value in 4 years } & 0 & 60,000 \
\text { Annual depreciation } & 10,000 & 75,000 \
\text { Anmual cash operating costs } & 200,000 &50,000\
\text { Remaining usefull life } & 4 \text { years }& 4 \text { years }
\end{array}$

Refer to Sunderland Wood Creations.What is the payback period for the computer-operated lathe?

Quizplus · Accepted Answer

To calculate payback period, we need to find out how long it will take to recover the initial investment. 
For the computer-operated lathe, the initial investment is $300,000 and the annual cash inflow is $50,000. 
Payback period = Initial investment / Annual cash inflow = $300,000 / $50,000 = 6 years. 
However, since the computer-operated lathe has a salvage value of $60,000 in 4 years, the net investment is only $240,000. 
So, revised payback period = Net investment / Annual cash inflow = $240,000 / $50,000 = 4.8 years. 
Therefore, the payback period for the computer-operated lathe is 4.8 years, which is approximately 1.87 years less than the remaining useful life of the lathe (4 years). 
Therefore, the best choice is to purchase the computer-operated lathe, as it has a shorter payback period and will likely provide a better return on investment in the long run.