Chapter 12, Problem 12.18AE

Compute payback period and analyze changes (Learning Objective 2)

The Cleveland Foodbank is a nonprofit organization that receives donations of food and distributes this food to appropriate charitable organizations. Many times, large quantities of food need to be shrinkwrapped to secure the items for shipping to the charitable organizations. The VP of Operations at the Cleveland Foodbank recently performed a time study of the time that its warehouse personnel spend waiting for the shrinkwrap machine to become available. He used this wait time data and the following assumptions to determine the financial benefit of buying a second shrinkwrap machine.

• Cost of new shrinkwrap machine plus installation = $24,000
• Average wait time per warehouse picker per day = 60 minutes
• Number of warehouse pickers = 7
• Hourly wage of warehouse personnel = $12.00
• Foodbank is open 5 days a week, 52 weeks a year, except for 10 holidays
• Expected useful life of machine = 15 years
• Expected salvage value = $2,000

Requirements

1. 1. What is the expected net cash inflow per year from purchasing a second shrinkwrap machine (i.e., how much cost could be saved each year by eliminating the wait time)?
2. 2. What is the payback period of the second shrinkwrap machine? Round your answer to the nearest two decimal places.
3. 3. What would the expected net cash inflow per year be if the hourly wage rate used for this analysis was increased by 25% to reflect the cost of employee benefits?
4. 4. What is the payback period of the second shrinkwrap machine when the increased wage rate is used to calculate the expected net cash inflow per year? Round your answer to the nearest two decimal places.
5. 5. Did the payback period using the increased hourly wage rate increase or decrease as compared to the original payback period using the hourly rate without any benefits included? Explain.