Determining the payback period The management team at Hillman Manufacturing Company has decided to modernize the manufacturing facility. The company can replace an existing, outdated machine with one of two technologically advanced machines. One replacement machine would cost $200,000. Management estimates that it would reduce cash outflows for manufacturing expenses by $80,000 per year. This machine is expected to have an eight-year useful life and a $5,000 salvage value. The other replacement machine would cost $252,000 and would reduce annual cash outflows by an estimated $90,000. This machine has an expected 10-year useful life and a $25,000 salvage value.

Required

a. Determine the payback period for each investment alternative and identify which replacement machine Hillman should buy if it bases the decision on the payback approach.

b. Discuss the shortcomings of the payback method of evaluating investment opportunities.