Question: Payback comparisons Nova Products has a 6-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 $35,000 and generates annual? after-tax cash inflows of $6, 000 for each of the next 9years. The second machine requires an initial investment of $28,000 and provides an annual cash inflow after taxes of $5,000 for 28years.
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 accept? Why?
d. Do the machines in this problem illustrate any of the weaknesses of using payback? ?(Select the best answer below.)
A. Machine 2 has returns that last 28years while Machine 1 has only 9years of returns. Payback cannot consider this? difference; it ignores all cash inflows beyond the payback period.
B. Machine 2 has returns that last 28years while Machine 1 has only 9years of returns. Payback considers only the first 9years for each machine.
C. Machine 2 has returns that last 28years while Machine 1 has only 9years of returns. Payback considers this? difference; it includes all cash inflows beyond the payback period.
D. Machine 2 has returns that last only 9years while Machine 1 has 28years of returns. Payback cannot consider this? difference; it ignores all cash inflows beyond the payback period.