The management team at Rawden Manufacturing Company has decided to modernize the manufacturing facility. The company can
Question:
The management team at Rawden Manufacturing Company has decided to modernize the manufacturing facility. The company can replace an existing, outdated machine with one of two technologically advanced machines. One replacement machine would cost $50,000. Management estimates that it would reduce cash outflows for manufacturing expenses by $20,000 per year. This machine is expected to have an eight-year useful life and a $1,250 salvage value. The other replacement machine would cost $63,000 and would reduce annual cash outflows by an estimated $22,500. This machine has an expected 10-year useful life and an $6,250 salvage value.
Required
a. Determine the payback period for each investment alternative and identify which replacement machine Rawden should buy if it bases the decision on the payback approach.
b. Discuss the shortcomings of the payback method of evaluating investment opportunities.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
a Cash cost of investment Annual cash inflow Payback ...View the full answer
Fundamental Managerial Accounting Concepts
ISBN: 978-0078110894
6th Edition
Authors: Edmonds, Tsay, olds
