Question
The payback period represents the time it takes for a project to recoup its initial investment. We'll use the incremental approach, which accumulates the annual
The payback period represents the time it takes for a project to recoup its initial investment. We'll use the incremental approach, which accumulates the annual cash savings until the total reaches the initial investment. For Machine A, the cumulative cash savings after Year 1 is $5,000. By Year 2, it's $10,000, and by Year 3, it's $15,000. In Year 4, it reaches the total savings of $20,000, which is equal to the initial investment. Therefore, the payback period for Machine A is 3 years. For Machine B, the cumulative cash savings after Year 1 is $8,000. By Year 2, it's $14,000, and by Year 3, it's $18,000. In Year 4, it reaches the total savings of $20,000. Thus, the payback period for Machine B is 3 years as well. Comment: Both machines have the same payback period, indicating that they recover their initial investment equally quickly. Unadjusted Rate of Return (ARR): The ARR is calculated as the average annual income divided by the average investment. For both machines, the average investment is half of the initial cost, which is $7,000. For Machine A, the average annual savings is ($5,000)
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