Determine the payback period of the investment

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Reference no: EM13934458

Traditionally, Granite Company has accepted a proposal only if the payback period is less than 50 percent of the asset's useful life. Peggy Casteel is the new accounting manager. She suggested to management that capital budgeting decisions should not be made based solely on the payback period. Granite Company is currently considering purchasing a new machine for the factory that would cost $112,000 and invest an additional $40,000 for inventories and other working capital needs. The machine would be sold after 8 years for $50,000. The new machine will generate annual cash flows of $30,000 in its first year of use, $24,000 in its second year of use, $20,000 in the third year, and $14,800 each year thereafter. The company's required rate of return is 12 percent.

Required:

1. Determine the payback period of the investment.

2. Determine the net present value of the investment.

3. Is this an acceptable investment?

4. Explain your answer

Reference no: EM13934458

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