Q20E Henry Hardware is adding a new p... [FREE SOLUTION]

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Chapter 26: Q20E (page 1469)

Henry Hardware is adding a new product line that will require an investment of $1,512,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $310,000 the first year, $270,000 the second year, and $240,000 each year thereafter for eight years. Compute the payback period. Round to one decimal place.

Short Answer

Expert verified

The payback period is 5.9 years.

Step by step solution

Meaning of Capital Investment

Capital investment is a sum of cash to assist a company in accomplishing its objectivesor buying long-term resources.

Computing payback period

Calculating annual cash flow

$\begin{array}{rcl} A n n u a l c a s h f l o w s f r o m t h e t w o y e a r s & = & F i r s t y e a r + S e c o n d y e a r \\ = & $ 310, 000 + $ 270, 000 \\ = & $ 580, 000 \end{array}$

Calculating payback period

$\begin{array}{rcl} P a y b a c k p e r i o d & = & \frac{I n i t i a l I n v e s t m e n t}{A n n u a l c a s h f l o w s} \\ = & \frac{($ 1, 512, 000 - $ 580, 000)}{$ 240, 000} \\ = & \frac{$ 932, 000}{$ 240, 000} \\ = & 3.9 y e a r s \end{array}$

The payback period is 5.9 years (2 years + 3.9 years)

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Year	Refurbish current machine	Purchase new machine
1	\(1,760,000	\)2,970,000
2	440,000	490,000
3	360,000	410,000
4	280,000	330,000
5	200,000	250,000
6	200,000	250,000
7	200,000	250,000
8	200,000	250,000
9		250,000
10		250,000
Total	\(3,640,000	\)5,700,000

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Short Answer

Step by step solution

Meaning of Capital Investment

Computing payback period

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