Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $15,000 and generates annual after-tax cash flows of $3,000 for each of the next 12 years. The second machine requires an initial investment of $29,000 and provides an annual cash inflow after taxes of $7,000 for 30 years.

A. Determine the payback period for each

Machine.

B. Comment on the acceptability of the machines, assuming that they are independent projects.

C. Which machine should the firm accept? Why?

D. Do the machines in this problem illustrate any of the weaknesses of using payback?