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Calculate the payback period

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Question - Shipton Ltd is considering the purchase of a new manufacturing machine. The purchase price is $85,000. The cost for shipping the machine to the plant is $2,000. Another $3,000 will be spent to remodel the area in which the machine is to be installed. The purchase price includes installation costs. The entity has already spent $1,500 in travel costs and employee time on the search for this machine. The machine is expected to save $30,000 a year in labour and insurance expenses over the next four years, and is expected to be obsolete in four years. Shipton uses a 10 per cent discount rate as the required rate of return on capital budgeting projects. Ignore income taxes.

(1) Calculate the net present value.

(2) Calculate the payback period. If the target payback period is 3.5 years, will you recommend the company to accept this project, and why?

Reference no: EM132767233

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