Laredo Laminates is considering the purchase of new production technology equipment requiring an initial $1,200,000 investment and having an expected ten year life. At the end of its life, the equipment would have no salvage value. By installing the new equipment, the firm’s annual labor and quality costs would decline by $600,000 a. Compute the payback period for this equipment. b. Assume instead that the annual cost savings would vary according to the following schedule: Years Annual Cost Savings 1–5 $350,000 6–10 500,000 Note: Round answer to two decimal places. Compute the payback period under the revised circumstances.
Laredo Laminates is considering the purchase of new production technology equipment requiring an initial $1,200,000 investment and having an expected ten year life. At the end of its life, the equipment would have no salvage value. By installing the new equipment, the firm’s annual labor and quality costs would decline by $600,000 a. Compute the payback period for this equipment. b. Assume instead that the annual cost savings would vary according to the following schedule: Years Annual Cost Savings 1–5 $350,000 6–10 500,000 Note: Round answer to two decimal places. Compute the payback period under the revised circumstances.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Payback period
Laredo Laminates is considering the purchase of new production technology equipment requiring an initial $1,200,000 investment and having an expected ten year life. At the end of its life, the equipment would have no salvage value. By installing the new equipment, the firm’s annual labor and quality costs would decline by $600,000
a. Compute the payback period for this equipment.
b. Assume instead that the annual cost savings would vary according to the following schedule:
| Years | Annual Cost Savings |
|---|---|
| 1–5 | $350,000 |
| 6–10 | 500,000 |
Note: Round answer to two decimal places.
Compute the payback period under the revised circumstances.
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