Question

Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two cutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and (2) Akron Industries. Regardless of which vendor Heartland chooses, the following incremental cash flows are expected to be realized.

Year	Incremental Cash Inflows				Incremental Cash Outflows
1	$	27,000			$	22,000
2		28,000				23,000
3		33,000				28,000
4		36,000				31,000
5		35,000				30,000
6		34,000				29,000

a. If the machine manufactured by Toledo Tools costs $30,000, what is its expected payback period?

b. If the machine manufactured by Akron Industries has a payback period of 60 months, what is its cost?

c. Which of the machines is most attractive based on its respective payback period?

Answer 1

Net cash flows

Year. Net cash inflows

1. 5,000

2. 5,000

3. 5,000

4. 5,000

5. 5,000

6. 5,000

A) if cost is 30,000 pay back period will be 30,000/5000 = 6 years

B) If pay back period is 60 months which is 5 years than cost will be 5*5000 =25,000

C) machine of akron ltd is more effective since it has lower pay back period.