Question

The Easton manufacturing Company is looking to replace its conveyor belt system. A new system will cost $345,000, and will result in cost savings of $220,000 in the first year, followed by savings of $100,000 per year over the following 3 years. If the firm’s cost of capital is 9%, what is the discounted payback period for this project? (Do not round intermediate computations. Round final answer to two decimal places.)

Answer 1

Answer:

It will take 3 years and 279 days to cover for the initial investment.

Explanation:

Giving the following information:

Initial investment= $345,000

Annual cost saving:

Cf1= $220,000

Cf2 to 4= $100,000

Discount rate= 9%

The payback period is the time required to cover for the initial investment:

Year 1= (220,000/1.09) - 345,000= -143,165.14

Year 2= (100,000/1.09^2) - 143,165.14= -58,997.14

Year 3= (100,000/1.09^3) - 58,997.14= 18,221.21

To be more accurate:

(58,997.14/77,218.35)*365= 279 days

It will take 3 years and 279 days to cover for the initial investment.