Question

The Corps is considering a new metal composition procedure to defend against yellow energy tarnishing of lantern rings. Three metal compositions (X, Y, and Z) are being considered that have initial costs of $34.000, $42,000, and $53,000 respectively, with an initial return on investment of $15,000 each. However, after year one, and until the end of the useful life of 4 years, the return on investment decreases each year by $4,500 for Metal X, $3,000 for Metal Y, and $750 for Metal Z: Which alternative should be selected based on classic (i = 0) payback period? Assume a MARR = 7%. Enter your answer choice in the text field, but submit all numerical work via work file submission. Grading Scale: Setup: 1.25 Points Calculations: 0.625 Points Answer: 0.375 Points Statement: 0.20 Points

Answer 1

Classic Payback period (PBP) ignores time value of money, and is the time by when cumulative cash flows becomes zero.

Alt - X				Alt - Y				Alt - Z
Year	Cash flow	Cumulative cash flow		Year	Cash flow	Cumulative cash flow		Year	Cash flow	Cumulative cash flow
0	-34,000	-34000		0	-42,000	-42000		0	-53,000	-53000
1	15,000	-19000		1	15,000	-27000		1	15,000	-38000
2	10,500	-8500		2	12,000	-15000		2	14,250	-23750
3	6,000	-2500		3	9,000	-6000		3	13,500	-10250
4	1,500	-1000		4	6,000	0		4	12,750	2500

PBP of Alt X > 4 years, so it is ignored.

PBP of alt Y = 4 years

PBP of Alt Z lies between years 3 & 4.

PBP = 3 + (Absolute value of cumulative cash flow, year 3 / Cash flow, year 4)

= 3 + (10,250 / 12,750)

= 3 + 0.8

= 3.8 years

Alt Z has lowest PBP, so is the best option.