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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Payback period, net present value analysis, and qualitative considerations

The plant manager of Jurassic Industries is considering the purchase of new automatedassembly equipment. The new equipment will cost $2,375,000. The manager believes thatthe new investment will result in direct labor savings of $500.000 per year for 10 years.

a. What is the payback period on this project?

b. What is the net present value, assuming a 10% rate of return? Use the present value tablesappearing in this chapter.

c. What eke should the manager consider in the analysis?

To determine

(a)

Concept introduction:

Cash payback period:

The time taken for earning the amount of investment made through the net cash flows.

Net present value method:

It is a method of determining the present value of cash flows over the period by the multiplying the cash flows with the discounting factor of the required rate.

To compute:

The cash payback period of this project.

Explanation

The payback period of the project is as follows:

  Pay back period=Inital InvestmentCash Inflows=$2

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