Response to the following problem:
Interpretation of present value analysis and payback
The CarCare Garage is considering an investment in a new tune-up computer. The cost of the computer is $48,000. A cost analyst has calculated the discounted present value of the expected cash flows from the computer to be $52,650, based on the firm's cost of capital of 12%.
Required:
a. What is the expected return on investment of the machine, relative to 12%? Explain your answer.
b. The payback period of the investment in the machine is expected to be 4.25 years. How much weight should this measurement carry in the decision about whether or not to invest in the machine? Explain your answer.