Table 11.5
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains.
-The payback period for the project is ________. (See Table 11.5)

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how long it takes for the project to recover its initial investment.

First, we need to calculate the initial investment:

Cost of new machine = $50,000 + $2,500 = $52,500

Sale of existing machine = $15,000

Net initial investment = $52,500 - $15,000 = $37,500

Next, we need to determine the annual cash inflows:

Annual operating cost savings = $17,000

To calculate the payback period, we divide the net initial investment by the annual cash inflow:

$37,500 ÷ $17,000 = 2.21 years

Therefore, the payback period for the project is between 3 and 4 years.

Based on this analysis, it may be worth considering the project, as it has a relatively short payback period and could result in significant cost savings over its useful life.

Table 11.5 Nuff Folding Box Company, Inc. Is Considering Purchasing a New