Capital Investment Decision: Payback Period Method E12A.
Eco Wet, Inc., a manufacturer of gears for lawn sprinklers, is thinking about add- ing a new fully automated machine. This machine can produce gears that the com- pany now produces on its third shift. The machine has an estimated useful life of ten years and will cost $500,000. The residual value of the new machine is $50,000. Gross cash revenue from the machine will be about $420,000 per year, and related operating expenses, including depreciation, should total $400,000. Depreciation is estimated to be $80,000 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 the computations that support your answer.