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In: Economics

Eb's Eggs just bought a new egg sorting machine for $106,944. The machine will save $32,760...

Eb's Eggs just bought a new egg sorting machine for $106,944. The machine will save $32,760 in year 1, $34,255 in year 2, $18,724 in year 3, and $8,568 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 $2,110. Eb uses a MARR of 7% to make decisions. What is the payback period (PBP) for this machine?

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Expert Solution

Col 1 Col 2 Col 3 Col 4 Col 5
Year Cash flows ($) Present Value Factor (P/F, 7%, n) Discounted Cash Flow Col 2 * Col 3 Cumulative Discounted cash flows($)
0 -106944 1.0000 -106944.00 -106944.00
1 32760 0.9346 30617.50 -76326.50
2 34255 0.8734 29918.32 -46408.19
3 18724 0.8163 15284.40 -31123.79
4 8568 0.7629 6536.53 -24587.26
5 8568 0.7130 6108.98 -18478.27
6 8568 0.6663 5708.86 -12769.42
7 8568 0.6227 5335.29 -7434.12
8 8568 0.5820 4986.58 -2447.55
9 8568 0.5439 4660.14 2212.59
10 8568 0.5083 4355.11 6567.70
11 8568 0.4751 4070.66 10638.36

PBP = 8 + |-2447.55| / 4660.14

        = 8 + (2447.55 / 4660.14)

        = 8 + 0.52

        = 8.52 years

Thus, the payback period (PBP) for this machine is 8.52 years.

Rahul Sunny answered 10 months ago
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