26.2 Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Twocutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and(2) Akron Industries. Regardless of which vendor Heartland chooses, the following incrementalcash flows are expected to be realized.Incremental Cash Incremental CashOutflowsYearInflows1$27,000$22,0002.28,00023,0003.33,00028,000436,00031,00035,00030,0006..34,00029,000If the machine manufactured by Toledo Tools costs $30,000, what is its expected paybacka.period?If the machine manufactured by Akron Industries has a payback period of 60 months, what isb.its cost?Which of the machines is most attractive based on its respective payback period? ShouldHeartland base its decision entirely on this criterion? Explain your answer.с.

Answered: Image /qna-images/answer/5d350a0f-1ca7-4836-8c19-997b05df691e.jpgPart a) Annual net inflows are identical, we will use following formula Payback period = inital cost/annual net inflows = 30000/5000 = 6 years Part b) 60 months are equivalent to 5 years Hence, cost = annual net inflows * payback period = 5 * 5000 = 25000 Part c) On the basis of payback period, akron industries proposal is better however decision can not be taken only on the basis payback period because, It doesn't consider the cashflows after recovery of cost. If doesn't consider time value of money. Other methods like NPV and IRR should also be used to appraise the decision.

Business

Accounting

Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two cutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and (2) Akron Industries. Regardless of which vendor Heartland chooses, the following incremental cash flows are expected to be realized. Incremental Cash Incremental Cash Outflows Year Inflows 1 $27,000 $22,000 28,000 23,000 3 33,000 28,000 36,000 31,000 35,000 30,000 6. 34,000 29,000

Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two cutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and (2) Akron Industries. Regardless of which vendor Heartland chooses, the following incremental cash flows are expected to be realized. Incremental Cash Incremental Cash Outflows Year Inflows 1 $27,000 $22,000 28,000 23,000 3 33,000 28,000 36,000 31,000 35,000 30,000 6. 34,000 29,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

26.2

Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two
cutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and
(2) Akron Industries. Regardless of which vendor Heartland chooses, the following incremental
cash flows are expected to be realized.
Incremental Cash Incremental Cash
Outflows
Year
Inflows
1
$27,000
$22,000
2.
28,000
23,000
3.
33,000
28,000
4
36,000
31,000
35,000
30,000
6..
34,000
29,000
If the machine manufactured by Toledo Tools costs $30,000, what is its expected payback
a.
period?
If the machine manufactured by Akron Industries has a payback period of 60 months, what is
b.
its cost?
Which of the machines is most attractive based on its respective payback period? Should
Heartland base its decision entirely on this criterion? Explain your answer.
с.

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