A11 - Exercise145 1 Year Investment CashInflow 1 2 3 4 5 6...

Exercise 14-5
1. The payback period is determined as follows:
Year Investment Cash Inflow Unrecovered
Investment
1 $15,000 $1,000 $14,000
2 $8,000 $2,000 $20,000
3 $2,500 $17,500
4 $4,000 $13,500
5 $5,000 $8,500
6 $6,000 $2,500
7 $5,000 $0
8 $4,000 $0
9 $3,000 $0
10 $2,000 $0
The investment in the project is fully recovered in the 7th year.
To be more exact, the payback period is approximately 6.5
years.
2. Since the investment is recovered prior to the last year, the
amount of the cash inflow in the last year has no effect on the
payback period.

Problem 14-29
1. Computation of the net annual cost savings:
Savings in labor costs (25,000 hours × $16 per hour). $400,000
Savings in inventory carrying costs ............................. 210,000
Total ............................................................................. 610,000
Less increased power and maintenance cost
($2,500 per month × 12 months) ...............................
30,000
Net annual cost savings .............................................. $580,000
2.
Year(s) Amount of
Cash Flows
20%
Factor
Present
Value of
Cash Flows
Cost of the robot ........... Now $(1,800,000) 1.000 $(1,800,000)
Installation and
software .....................
Now $(900,000) 1.000 (900,000)
Cash released from
inventory ....................
1 $400,000 0.833 333,200
Net annual cost savings 1-10 $580,000 4.192 2,431,360
Salvage value ............... 10 $70,000 0.162 11,340
Net present value .......... $ 75,900
Yes, the robot should be purchased. It has a positive net
present value at a 20% discount rate.
3. Recomputation of the net annual cost savings:
Savings in labor costs (22,500 hours × $16 per hour). $360,000
Savings in inventory carrying costs ............................. 210,000
Total ............................................................................. 570,000
Less increased power and maintenance cost
($2,500 per month × 12 months) ...............................
30,000

Net annual cost savings .............................................. $540,000

Problem 14-29 (continued)
Recomputation of the net present value of the project:
Year(s) Amount of
Cash Flows
20%
Factor
Present
Value of
Cash Flows
Cost of the robot ............ Now $(1,800,000) 1.000 $(1,800,000)