*Separation machine would replace an old work phase and increase this phase’s capacity with 10%. *The...
*Separation machine would replace an old work phase and increase this phase’s capacity with 10%.
*The new equipment would cost 225 000 €, and its lifetime is estimated as 7 years.
*The increase in capacity would cause extra revenue of 60 000 € per year.
*Based on this information, calculate the payback time.
*Is this project justified, if the company’s maximum payback time is 4 years?
Homework Answers
| Cash Inflow | Net cash outflow | |
| 0 | 0 | -225000 |
| 1 | 60000 | -165000 |
| 2 | 60000 | -105000 |
| 3 | 60000 | -45000 |
| 4 | 60000 | 0 |
So Payback period lies somewhere in the 4th year. Further, 45000/60000*12 = 9 months. So Payback Period = 3 Years, 9 Months.
Since the Project Payback is within the required 4 years, the Project is Justified.
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