Nova Products has a

6-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

$9,000

and generates annual after-tax cash inflows of

$2,000

for each of the next

12

years. The second machine requires an initial investment of

$32,000

and provides an annual cash inflow after taxes of

$5,000

for

24

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?