Question

3. A new inventory management system for ABC company could be developed at a cost of $280,000. The estimated net operating costs and estimated new benefits over six years of operation would be: Year Estimated Net Operating Costs Estimated New Benefits 0 ($280,000) $0 1 ($6,000) $40,000 2 ($9,800) $80,000 3 ($11,000) $82,000 4 ($14,000) $115,000 5 ($15,000) $120,000 6 ($25,000) $140,000 In your answers to the questions below please show your calculations (i.e., turn in a copy of your calculations or a printout of your MS Excel worksheet). a. What would be the payback period for this investment? (4 points)

Answer 1

4.04 years / 4 years

Step-by-step explanation:

Payback period is the time period in which initial investment of the asset recovered from it benefit. In this question $280,000 is initially invested in the system. The recovery schedule of $280,000 is follow

Year Net Operating Costs New Benefits Net Cash Flow Balance

0 ($280,000) $0 ($280,000) ($280,000)

1 ($6,000) $40,000 $34,000 ($246,000)

2 ($9,800) $80,000 $70,200 ($175,800)

3 ($11,000) $82,000 $71,000 ($104,800)

4 ($14,000) $115,000 $101,000 ($3,800)

5 ($15,000) $120,000 $105,000 $101,200

6 ($25,000) $140,000 $115,000 $216,200

First fours years have recovered the amount in the fifth year on $3,800 is recovered against initial investment out of $105,000

So,

Payback period = 4 years + $3,800 / $105,000 = 4.04 years