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Fundamentals of Engineering Economics (3rd Edition)

Chapter 5, Problem 7P (4 Bookmarks) Show all steps: ON
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J&M Manufacturing plans on purchasing a new assembly machine for $32,000 to automate one
of its current manufacturing operations. It will cost an additional $3,500 to have the new machine
installed. With the new machine, J&M expects to save $12,000 in annual operating and Continue to post
maintenance costs. The machine will last five years with an expected salvage value of $5,000.
12 questions remaining
(a) How long will it take to recover the investment (plus installation cost)? Post a question
(b) If J&M’s interest rate is known to be 17%, determine the discounted payback period. Answers from our experts for your tough
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Step 1 of 12 12 questions remaining

It is given that the initial cost of the machine is $35,500 ($32,000+$3,500) and the salvage value
at the end of its useful life, that is 5 years, is $5,000. Annual savings from the machine are
$12,000. My Textbook Solutions

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Step 2 of 12 Fundamental Electronic Microelectro

s of... Devices... ic Circuit...
3rd Edition 9th Edition 5th Edition
(a) Payback period without interest rate
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Payback period is equal to the year when the cumulative cash flow becomes positive value.
Payback period can be calculated using the following formula of the cumulative cash flow:
My Textbook Solutions
…… (1)

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Fundamental Electronic Microelectro

s of... Devices... ic Circuit...
3rd Edition 9th Edition 5th Edition
Step 3 of 12
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Net cash flow

Table -1 shows the net cash flow.

Table-1 Chegg tutors who can help

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Inflow Outflow
Year Net cash flow Abagolu
(revenues) (expenses) University of Nigeria 466

0 0 35,500 –35,500 Grisha

PhD - Capella Univ… 248

1 12,000 0 12,000 Kosuri

206

2 12,000 0 12,000
FIND ME A TUTOR

3 12,000 0 12,000

4 12,000 0 12,000
 5 17,000 0 12,000

Inflow refers to all the revenue to the firm. Outflow refers to all the expense of the firm. Net cash
flow is calculated by subtracting the outflow from the inflow.

Comments (1)

Step 4 of 12

Cumulative cash flow for first year:

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Step 5 of 12

Substitute the respective values in Equation (1) to calculate the first-year cumulative cash flow
value.

Hence, the first-year cumulative cash flow is .

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Step 6 of 12

Cumulative cash flow without interest rate:

Hence, similar calculation is followed in Table-2 by using the Equation (1) to obtain the
cumulative cash flow values.

Table-2

Year Net cash flow Cumulative cash flow

0 –35,500 –35,500

1 12,000 –23,500

2 12,000 –11,500

3 12,000 500

4 12,000 12,500

5 12,000 29,500

In Table-2 cumulative cash flow become positive value in the year 3. Hence, it will take 3 years to
recover the investment.

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Step 7 of 12

(b) Payback period for interest rate 17 percent

Payback period is equal to the year when the cumulative cash flow becomes positive value.
Payback period can be calculated using the following formula of the cumulative cash flow:
 …… (2)

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Step 8 of 12

First year cumulative cash flow:

Substitute the respective values in Equation (2) to calculate the cumulative cash flow in year 1.

Hence, first year cumulative cash flow is .

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Step 9 of 12

Second year cumulative cash flow:

Substitute the respective values in Equation (2) to calculate the cumulative cash flow in year 2.

Hence, the second-year cumulative cash flow is .

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Step 10 of 12

Third year cumulative cash flow:

Substitute the respective values in Equation (2) to calculate the cumulative cash flow in year 3.

Hence, the third-year cumulative cash flow is .

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Step 11 of 12

Fourth year cumulative cash flow:

Substitute the respective values in Equation (2) to calculate the cumulative cash flow in year 4.

Hence, the fourth-year cumulative cash flow is .

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Step 12 of 12

Fifth year cumulative cash flow:

 Substitute the respective values in Equation (2) to calculate the cumulative cash flow in year 5.

Hence, the fifth-year cumulative cash flow is . Since the value become positive in the
fifth year, the discounted payback period is 5 years.

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Recommended solutions for you in Chapter 1

Chapter 1, Problem 3STQ Chapter 1, Problem 2STQ

Which of the following statements defines the
discipline of engineering economics most closely?
(a) Economic decisions made by engineers. (b)
Economic decisions related to financial assets. (c)
Economic decisions primarily for real assets...
View this solution
When evaluating a large-scale engineering project,
which of the following items is important? (a)
Expected profitability (b) Timing of cash flows (c)
Degree of financial risk (d) All of the above
View this solution

Recommended solutions for you in Chapter 1

Chapter 1, Problem 3STQ Chapter 1, Problem 2STQ

Which of the following statements defines the
discipline of engineering economics most closely?
(a) Economic decisions made by engineers. (b)
Economic decisions related to financial assets. (c)
Economic decisions primarily for real assets...
View this solution
When evaluating a large-scale engineering project,
which of the following items is important? (a)
Expected profitability (b) Timing of cash flows (c)
Degree of financial risk (d) All of the above
View this solution

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