Ping Pong Company is planning to purchase a machine capable to do certain operations that are now performed manually. This machine will cost $50,000, and it will last for five years. At the end of the five-year period, the machine will have a zero-scrap value. Moreover, use of the machine will reduce labour costs by $18,000 per year. Ping Pong Company requires a minimum return of 20 percent before taxes on all investment project.

Required:

1. Should the machine be purchased? Use the net present value method in your calculation.
2. What is the payback period for this machine?
3. Which method would you prefer and why?

1.

	Future Cost Savings	PV of Future Cost Savings PV = FV / (1+i)t
Year 1	$18,000
Year 2	$18,000
Year 3	$18,000
Year 4	$18,000
Year 5	$18,000
Total

NPV Calculation:

PV of Future Cost Savings
Less: Initial Cost of Investment
= Net Present Value (NPV)