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Given the following information, calculate the Payback for a capital budget proposal. Show your work. Machine...
Given the following information, calculate the Payback for a capital budget proposal. Show your work. Machine Cost: $6,000,000 Salvage Value: $50,000 Setup Costs: $45,000 Training Costs: $25,000 Annual maintenance costs: $45,000 Anticipated annual savings: $560,000 Annual labor savings: $25,000 Expected useful life in years: 12 Overhaul costs in year 4: $50,000 Annual operating costs: $25,000 Hurdle rate: 8%
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| Initial Investment | ||
| Machine Cost | $6,000,000.00 | |
| Setup Cost | $45,000.00 | |
| Training Cost | $25,000.00 | |
| Initial Investment | $6,070,000.00 | |
| Anticipated annual savings | $560,000.00 | |
| Annual labor savings | $25,000.00 | |
| Less: | ||
| Annual maintenance costs | -$45,000.00 | |
| Annual operating costs | -$25,000.00 | |
| Net Annual Savings | $515,000.00 | |
| Year 4 Cash flow = $515000 - 50000 = $465000 | ||
| Year 12 Cash flow = $515000 + 50000 = $565000 | ||
| Year | Cash Flow | Cumulative Cash Flow |
| 0 | -$6,070,000.00 | -$6,070,000.00 |
| 1 | $515,000.00 | -$5,555,000.00 |
| 2 | $515,000.00 | -$5,040,000.00 |
| 3 | $515,000.00 | -$4,525,000.00 |
| 4 | $465,000.00 | -$4,060,000.00 |
| 5 | $515,000.00 | -$3,545,000.00 |
| 6 | $515,000.00 | -$3,030,000.00 |
| 7 | $515,000.00 | -$2,515,000.00 |
| 8 | $515,000.00 | -$2,000,000.00 |
| 9 | $515,000.00 | -$1,485,000.00 |
| 10 | $515,000.00 | -$970,000.00 |
| 11 | $515,000.00 | -$455,000.00 |
| 12 | $565,000.00 | |
| Payback = 11 years + $455000/565000 | 11.81 | Years |
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