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Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computeroperated lathe
Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computeroperated lathe. Information on the existing lathe and the computer-operated lathe follow:
|
|
Existing lathe |
Computer-operated lathe |
|
Cost |
$100,000 |
$300,000 |
|
Accumulated depreciation |
60,000 |
0 |
|
Salvage value now |
20,000 |
|
|
Salvage value in 4 years |
0 |
60,000 |
|
Annual depreciation |
10,000 |
75,000 |
|
Annual cash operating costs |
200,000 |
50,000 |
|
Remaining useful life |
4 years |
4 years |
Refer to Sunderland Wood Creations. What is the payback period for the computer-operated lathe?
- 1.87 years
- 2.00 years
- 3.53 years
- 3.29 years
Expert Solution
Answer:
A . 1.87 years
Step-by-Step explanation
Net cash outflow = Cost of computer operated lathe - Salvage value of existing lathe
= $300,000 - $20,000
= $280,000
Cost saving = Operting cost in existing lathe - Operting cost in new lathe
= $200,000 - $50,000
= $150.000
Cash inflow for year 1 = $150,000
Cumulative saving in year 2 = $300,000
Pay back period = 1 year + ($280,000 - $150,000) / $150,000
= 1.87 years
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