Problem
A hotel is considering purchasing an energy efficient refrigerator. Two models are under consideration and will cost $32,500 for Machine X and $41,350 for Machine Y. Machine X is estimated to save $4,500 per year in electricity costs, while Machine Y will save $7,200 per year. Machine X is expected to last for 12 years, while Machine will be scrapped after 7 years. Neither machine will require maintenance and both will have zero value at the end of their useful life. Current tax rules allow both machines to be depreciated over 5 years.
Task
i. Which is the best investment using the payback period method?
ii. Explain why the pay back method is a poor method to evaluate capital purchases.