Question

8. Dammon Corp. has the following investment opportunities:

Year	Machine A ($15,000)	Machine B ($22,500)	Machine C ($37,5000)
	Inflows:	Inflows:	Inflows:
1	$6,000	$12,000	$0
2	9,000	12,000	30,000
3	3,000	10,500	30,000
4	0	10,500	15,000
5	0	0	15,000

Under the payback period and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose?
A. Machine A
B. Machine B

C. Machine C
D. None of the machines will be accepted.

Answer 1

Machine A

Payback is computed using the below formula:

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                             = $6,000 + $9,000

                            = $15,000.

The payback period is 2 years.

Machine B

= 1 year + ($22,500 - $12,000)/ $12,000

= 1 year + 10,500/ $12,000

= 1 year + 0.8750

= 1.8750 years    1.88 years.

Machine C

= 2 years + ($37,500 - $30,000)/ $30,000

= 2 years + $7,500/ $30,000

= 2 years + 0.25

= 2,25 years.

Machine B should be selected since it has the shortest payback period.

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