Question

In: Finance

Blossom Corp. is investing in a new computer system. The new system costs $1,250,000 in the...

Blossom Corp. is investing in a new computer system. The new system costs $1,250,000 in the current year, but will generate an annual cash inflow of $350,000 for the next six years. Assuming the company’s cost of capital is 12%, the discounted payback period of this project is closest to _______.

Group of answer choices

a. 4 years

b. 3 years

c. 5 years

d. 6 years

Solutions

Expert Solution

Discounted cash flow of each year = cash flow / (1 + cost of capital)n

where n = number of years after which cash flow occurs

Discounted payback period is the time taken for the cumulative cash flows to equal zero

Discounted payback period = 4 + (discounted cash flow required in year 5 for cumulative discounted cash flows to equal zero / year 5 discounted cash flow) = 4 + ($186,928 / $198,599) = 4.940 years

the discounted payback period of this project is closest to (c) 5 years


Related Solutions

Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $2,448,125 and will generate...
Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $2,448,125 and will generate cost savings of $1,253,325 in each of the next five years. The Beta 2100 system costs $3,387,500 and will produce cost savings of $921,750 in the first three years and then $2 million for the next two years. The company’s discount rate for similar projects is 14 percent. What is the NPV of each system? (Enter negative amounts using negative sign, e.g. -45.25. Do...
Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $3,006,625 and will generate...
Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $3,006,625 and will generate cost savings of $1,548,725 in each of the next five years. The Beta 2100 system costs $4,627,500 and will produce cost savings of $1,177,750 in the first three years and then $2 million for the next two years. The company’s discount rate for similar projects is 14 percent. What is the NPV of each system? (Enter negative amounts using negative sign, e.g. -45.25. Do...
A firm is considering whether to install a new computer system. The computer system costs $800,000...
A firm is considering whether to install a new computer system. The computer system costs $800,000 today and is expected to increase the firm’s productivity so much that the firm will earn $250,000 each year for four years starting one year from today. If the real interest rate is 10%, should the firm install the new computer system? (Make sure that you show the formula in your answer. Show your work.)
The Aaron Corp purchased a new computer system on June 11, 2017, for $680,000. What is...
The Aaron Corp purchased a new computer system on June 11, 2017, for $680,000. What is the maximum deduction Aaron can take this year on this computer system? Show your computations and discuss/explain the alternatives in how you arrive at your answer.
Blossom Corp. is considering the purchase of a piece of equipment that costs $30000. Projected net...
Blossom Corp. is considering the purchase of a piece of equipment that costs $30000. Projected net annual cash flows over the project’s life are: Year Net Annual Cash Flow 1 $8000 2 15000 3 25000 4 9000 The cash payback period is
It is required to install a new computer control system. This new computer control system could...
It is required to install a new computer control system. This new computer control system could be purchased at a cost of $125,000. The project working life of this system is 05 years with a salvage value of $50,000. The working capital investment is $23,331 for this project. The annual labor savings due to this project will be $100,000. Additional annual expenses involve labor expense of $20,000, Material expense of $12,000 & Overhead expense of $8,000. Use Straight Line Depreciation...
CASE: On January 1, CBU installed a new computer system for tracking and calculating inventory costs....
CASE: On January 1, CBU installed a new computer system for tracking and calculating inventory costs. On December 31, at years-end closing, CBU’s system reported inventory at $4.5 million for financial statement purposes. At midnight, the auditors performed a physical inventory count and found the inventory total to be $3.5 million. To correct the discrepancy, CBU’s accounting staff processed an adjusting entry to reduce inventory by $1.0 million. The next day, 2 accountants were discussing the events of the previous...
CASE: On January 1, CBU installed a new computer system for tracking and calculating inventory costs....
CASE: On January 1, CBU installed a new computer system for tracking and calculating inventory costs. On December 31, at year-end closing, CBU’s system reported inventory at $4.5 million for financial statement purposes. At midnight, the auditors performed a physical inventory count and found the inventory total to be $3.5 million. To correct the discrepancy, CBU’s accounting staff processed an adjusting entry to reduce inventory by $1.0 million. The next day, 2 accountants were discussing the events of the previous...
XYZ corp. is considering investing in a new machine. The new machine cost will $ 8,000...
XYZ corp. is considering investing in a new machine. The new machine cost will $ 8,000 installed. Depreciation expense on the new machine will be $ 1,200 per year for the next five years. At the end of the fifth year XYZ expects to sell the machine for $3000. XYZ will also sell its old machine today that has a book value of $4000 for $4000. The old machine has depreciation expense of $800 per year and zero salvage value....
Assume that on January 1, 2017, Elmer’s Restaurants sells a computer system to Blossom Finance Co....
Assume that on January 1, 2017, Elmer’s Restaurants sells a computer system to Blossom Finance Co. for $820,000 and immediately leases the computer system back. The relevant information is as follows. 1. The computer was carried on Elmer’s books at a value of $740,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Elmer’s, and the expected residual value at the end of the lease is $590,000, all of which is unguaranteed. 3. The...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT