1. What is the decision criteria for Payback Period (PBP) method?

A construction company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows:

Cost of the equipment $220,000

Annual cost savings from new equipment $44,000

Life of the new equipment 10 years

Compute the payback period for the equipment. If the company requires a payback period of five years or less, would the equipment be purchased?

2. Pan American Bottling Company is considering the purchase of new machine that would increase the speed of bottling and save money. The net cost of the machine is $45,000. Following are the projections of annual cash flow for 5 years.

Year Annual Cash Flows

1 $15,000

2 20,000

3 25,000

4 10,000

5 5,000

What is the NPV of new machine of cost of capital is 10 percent?