(b) Calculate the discounted payback period for both machines (answers in years, months, and days)
To calculate the discounted payback period, we need to determine the present value of each cash inflow and then calculate the cumulative present value until it equals or exceeds the initial cost of the machine.
For Machine A:
Year 1: PV = 36,000 / (1 + 0.07)^1 = 33,645.98
Year 2: PV = 24,000 / (1 + 0.07)^2 = 21,238.94
Year 3: PV = 46,000 / (1 + 0.07)^3 = 37,607.92
Year 4: PV = 43,500 / (1 + 0.07)^4 = 33,333.33
Year 5: PV = 8,500 / (1 + 0.07)^5 = 6,267.94
Cumulative Present Value:
Year 1: 33,645.98
Year 2: 33,645.98 + 21,238.94 = 54,884.92
Year 3: 54,884.92 + 37,607.92 = 92,492.84
Year 4: 92,492.84 + 33,333.33 = 125,826.17
Year 5: 125,826.17 + 6,267.94 = 132,094.11
The discounted payback period for Machine A is between 4 and 5 years.
For Machine B:
Year 1: PV = 35,000 / (1 + 0.07)^1 = 32,710.28
Year 2: PV = 35,000 / (1 + 0.07)^2 = 30,632.91
Year 3: PV = 35,000 / (1 + 0.07)^3 = 28,663.47
Year 4: PV = 35,000 / (1 + 0.07)^4 = 26,795.79
Year 5: PV = 35,000 / (1 + 0.07)^5 = 25,024.16
Cumulative Present Value:
Year 1: 32,710.28
Year 2: 32,710.28 + 30,632.91 = 63,343.19
Year 3: 63,343.19 + 28,663.47 = 92,006.66
Year 4: 92,006.66 + 26,795.79 = 118,802.45
Year 5: 118,802.45 + 25,024.16 = 143,826.61
The discounted payback period for Machine B is between 4 and 5 years.