You have the opportunity to expand your business by purchasing new equipment for $152,000. The equipment has a useful life of 9 years. You expect to incur cash fixed costs of $79,000 per year to use this new equipment, and you expect to incur cash variable costs in the amount of 5% of annual revenues. Your cost of capital is 6%. Requirements 1. Calculate the payback period and the discounted payback period for this investment, assuming you will generate $150,000 in cash revenues every year. 2. Assume instead you expect a cash revenue stream for this investment. Based on this estimated revenue stream, Year 1 $ 105,000 Year 2 115,000 Year 3 110,000 Year 4 90,000 Year 5 160,000 Year 6 150,000 Year 7 160,000 Year 8 110,000 Year 9 160,000 What are the payback and discounted payback periods for this investment
You have the opportunity to expand your business by purchasing new equipment for $152,000.
The equipment has a useful life of 9 years. You expect to incur cash fixed costs of $79,000 per year to use this new equipment, and you expect to incur cash variable costs in the amount of 5% of annual revenues. Your cost of capital is 6%.
Requirements
1. |
Calculate the payback period and the discounted payback period for this investment, assuming you will generate $150,000 in cash revenues every year. |
2. |
Assume instead you expect a cash revenue stream for this investment. Based on this estimated revenue stream, Year 1 $ 105,000 Year 2 115,000 Year 3 110,000 Year 4 90,000 Year 5 160,000 Year 6 150,000 Year 7 160,000 Year 8 110,000 Year 9 160,000
What are the payback and discounted payback periods for this investment? |
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