Reference: 10-13
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 15

Multiple Choice

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.
-Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value. The project would provide net income each year as follows for the life of the project: $$\begin{array} { | l | c | c | } \hline \text { Sales } & & \$ 500,000 \\\hline \text { Less cash variable expenses } & & 200,000 \\\hline \text { Contribution margin } & & 300,000 \\\hline \text { Less fixed expenses: } & & \\\hline \text { Fixed cash expenses } & \$ 150,000 & \\\hline \text { Depreciation expenses } & 45,000 & 195,000 \\\hline \text { Net income } & & \$ 105,000 \\\hline\end{array}$$ The company's required rate of return is 12%. What is the payback period for this project?

• A)3 years
• B)4.28 years
• C)2 years
• D)9 years

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