Question

Eb's Eggs just bought a new egg sorting machine for $109,569. The machine will save $32,567 in year 1, $31,888 in year 2, $15,041 in year 3, and $9,316 per year from year 4 until the machine is salvaged at the end of year 11. At the end of year 11 it will have a salvage value of $2,409. Eb uses a MARR of 9% to make decisions.

What is the payback period (PBP) for this machine?

Answer 1

For convention payback period, we do not discount future cash flows. we find Cumulative cash flow (CCF), we need to find the year in which CCF turns positive

Convention payback period = Year bef CCF turns positive + (Absolute value of CCF bef it turns positive/Value of cash flow in the year in which CCF turns positive)

using excel (simple payback)

year	Net cash Flow	CCF
0	-109569	-109569
1	32567	-77002
2	31888	-45114
3	15041	-30073
4	9316	-20757
5	9316	-11441
6	9316	-2125
7	9316	7191
8	9316	16507
9	9316	25823
10	9316	35139
11	11725	46864

Conventional payback period = 6 + 2125 / 9316 = 6.23 yrs

Showing formula in excel

year	Net cash Flow	CCF
0	-109569	=AP3
1	32567	=AP4+AQ3
2	31888	=AP5+AQ4
3	15041	=AP6+AQ5
4	9316	=AP7+AQ6
5	9316	=AP8+AQ7
6	9316	=AP9+AQ8
7	9316	=AP10+AQ9
8	9316	=AP11+AQ10
9	9316	=AP12+AQ11
10	9316	=AP13+AQ12
11	=2409+9316	=AP14+AQ13