Foster Company wants to buy a special automated machine to replace an existing manual system. The initial outlay (cost) is $3,500,000. The new machine will last 5 years with no expected salvage value. The expected annual cash flows are as follows: YearCash InflowCash Outflow 0 $ - $ 3,500,000.00 1 $ 3,900,000.00 $ 3,000,000.00 2 $ 3,900,000.00 $ 3,000,000.00 3 $ 3,900,000.00 $ 3,000,000.00 4 $ 3,900,000.00 $ 3,000,000.00 5 $ 3,900,000.00 $ 3,000,000.00 Foster has a cost of capital equal to 10%. 1. Calculate the payback period. Payback period: years

Initial Investment: The total amount spent on acquiring the machine is $3,500,000. Annual Net Cash…

Answered: Foster Company wants to buy a special…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 21BEA

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Foster Company wants to buy a special automated machine to replace an existing manual system. The initial outlay (cost) is $3,500,000. The new machine will last 5 years with no expected salvage value. The expected annual cash flows are as follows:

Year	Cash Inflow	Cash Outflow
0	$ -	$ 3,500,000.00
1	$ 3,900,000.00	$ 3,000,000.00
2	$ 3,900,000.00	$ 3,000,000.00
3	$ 3,900,000.00	$ 3,000,000.00
4	$ 3,900,000.00	$ 3,000,000.00
5	$ 3,900,000.00	$ 3,000,000.00

Foster has a cost of capital equal to 10%.

1. Calculate the payback period.
Payback period:		years