Capital Investment Decision: Payback Period Method
E 11. Perfection Sound, Inc., a manufacturer of stereo speakers, is thinking about adding a new plastic-injection molding machine. This machine can produce speaker parts that the company now buys from outsiders. The machine has an estimated useful life of 14 years and will cost $425,000. The residual value of the new machine is $42,500. Gross cash revenue from the machine will be about $400,000 per year, and related cash expenses should total $310,050. Depreciation is estimated to be $30,350 annually. The payback period should be five years or less.
Use the payback period method to determine whether the company should invest in the new machine. Show your computations to support your answer.