Payback comparisons Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $11,000 and generates annual cash inflows of $2,00 each of the next 7 years. The second machine requires an initial investment of $10,000 and provides an annual cash inflow of $3,000 for 20 years. a. Determine the payback period for each machine. b. Comment on the acceptability of the machines, assuming that they are independent projects. s. Which machine should the firm buy? Why? d. Does this problem illustrate any of the payback method's weaknesses? a. The payback period for the first machine is The payback period for the second machine is b. Is the first machine acceptable? (Select the best answer below.) years. (Round to two decimal places.) years. (Round to two decimal places.) OYes O No is the second machine acceptable? (Select the best answer below.) O No OYes c. Based on their payback periods, which machine should the firm accept? (Select the best answer below.) OA. Neither OB. Machine 1 OC. Machine 2 d. Does this problem illustrate any of the payback method's weaknesses? (Select the best answer below.) OA. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback considers this difference; it includes all cash inflows beyond the payback period. OB. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback considers only the first 7 years for each machine. OC. Machine 2 has returns that last only 7 years while Machine 1 has 20 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period. OD. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period.
Payback comparisons Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $11,000 and generates annual cash inflows of $2,00 each of the next 7 years. The second machine requires an initial investment of $10,000 and provides an annual cash inflow of $3,000 for 20 years. a. Determine the payback period for each machine. b. Comment on the acceptability of the machines, assuming that they are independent projects. s. Which machine should the firm buy? Why? d. Does this problem illustrate any of the payback method's weaknesses? a. The payback period for the first machine is The payback period for the second machine is b. Is the first machine acceptable? (Select the best answer below.) years. (Round to two decimal places.) years. (Round to two decimal places.) OYes O No is the second machine acceptable? (Select the best answer below.) O No OYes c. Based on their payback periods, which machine should the firm accept? (Select the best answer below.) OA. Neither OB. Machine 1 OC. Machine 2 d. Does this problem illustrate any of the payback method's weaknesses? (Select the best answer below.) OA. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback considers this difference; it includes all cash inflows beyond the payback period. OB. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback considers only the first 7 years for each machine. OC. Machine 2 has returns that last only 7 years while Machine 1 has 20 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period. OD. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Payback comparisons Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $11,000 and generates annual cash inflows of $2,000 for
each of the next 7 years. The second machine requires an initial investment of $10,000 and provides an annual cash inflow of $3,000 for 20 years.
a. Determine the payback period for each machine.
b. Comment on the acceptability of the machines, assuming that they are independent projects.
c. Which machine should the firm buy? Why?
d. Does this problem illustrate any of the payback method's weaknesses?
a. The payback period for the first machine is
The payback period for the second machine is
b. Is the first machine acceptable? (Select the best answer below.)
Yes
No
Is the second machine acceptable? (Select the best answer below.)
No
Yes
years. (Round to two decimal places.)
years. (Round to two decimal places.)
c. Based on their payback periods, which machine should the firm accept? (Select the best answer below.)
A. Neither
B. Machine 1
C. Machine 2
d. Does this problem illustrate any of the payback method's weaknesses? (Select the best answer below.)
O A. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback considers this difference; it includes all cash inflows beyond the payback period.
B. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback considers only the first 7 years for each machine.
C. Machine 2 has returns that last only 7 years while Machine 1 has 20 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period.
D. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period.
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