For the new equipment purchase how do you calculate the Payback calculation and advise if the equipment will pay itself back within the required timeframe which is 4 years Riley Jones, Manager In Charge of Manufacturing and Fabrication (Manager 2), has a request related to cash flow related business decisions Riley Jones is keen to purchase new fabrication equipment which is much safer to operate, more energy efficient and, therefore, can potentially complete specific key fabrication jobs more economically The cost reduction is expected make fabrication jobs more affordable, leading to lead to an expanded customer base and, consequently, increased sales Riley Jones is preparing a business case to support the acquisition of the new equipment and expansion of the customer base but needs your calculations, advice on cash flow, and an explanation of the tax implications relating to the proposal Manager 2 (Riley Jones) has provided the following information Expansion of customer base with credit sales This manufactured product is sold on a Cash On Delivery (COD) basis Monthly sales are currently $150,000, and cost of goods sold is 70 of sales The new equipment is expected to reduce cost of goods sold to 60 Customers will no longer be required to pay COD and will be given credit terms of 30 days This is expected to increase sales to $250,000 per month It is expected sales will be collected in the following pattern 20 of customers will pay at the end of one month 25 of customers will pay at the end of 2 months 30 of customers will pay at the end of 3 months 20 of customers will pay at the end of 4 months 5 of customers will become bad debts Cost of capital per month is 1 Acquisition of new equipment The new equipment must pay back FAB Plastics within 4 years The information below outlines the payback result, which will be included in the acquisition proposal Calculation Result Cost $4,100,000 Residual value $0 Useful life 5 years Depreciation method Straight line Expected net cashflows Year 1 $1,200,000 Year 2 $1,200,000 Year 3 $1,100,000 Year 4 $1,000,000 Year 5 $1,000,000

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For the new equipment purchase how do you calculate the Payback calculation and advise if the equipment will pay itself back within the required timeframe

For the new equipment purchase how do you calculate the Payback calculation and advise if the equipment will pay itself back within the required timeframe which is 4 years.

Riley Jones, Manager-In-Charge of Manufacturing and Fabrication (Manager 2), has a request related to cash flow-related business decisions. Riley Jones is keen to purchase new fabrication equipment which is much safer to operate, more energy efficient and, therefore, can potentially complete specific key fabrication jobs more economically. The cost reduction is expected make fabrication jobs more affordable, leading to lead to an expanded customer base and, consequently, increased sales.

Riley Jones is preparing a business case to support the acquisition of the new equipment and expansion of the customer base but needs your calculations, advice on cash-flow, and an explanation of the tax implications relating to the proposal.

Manager 2 (Riley Jones) has provided the following information:

Expansion of customer base with credit sales

This manufactured product is sold on a Cash On Delivery (COD) basis. Monthly sales are currently $150,000, and cost of goods sold is 70% of sales. The new equipment is expected to reduce cost of goods sold to 60%. Customers will no longer be required to pay COD and will be given credit terms of 30 days. This is expected to increase sales to $250,000 per month.

It is expected sales will be collected in the following pattern:

20% of customers will pay at the end of one month
25% of customers will pay at the end of 2 months
30% of customers will pay at the end of 3 months
20% of customers will pay at the end of 4 months
5% - of customers will become bad debts

Cost of capital per month is 1%.

Acquisition of new equipment

The new equipment must pay back FAB Plastics within 4 years. The information below outlines the payback result, which will be included in the acquisition proposal.

Calculation	Result
Cost	$4,100,000
Residual value	$0
Useful life	5 years
Depreciation method	Straight line
Expected net cashflows:
Year 1:	$1,200,000
Year 2:	$1,200,000
Year 3:	$1,100,000
Year 4:	$1,000,000
Year 5:	$1,000,000