|Particulars||Machine A||Machine B|
|Cost of the machine||60000||40000|
|Net annual benefit||10000||10000|
|Life (in years)||10||4|
|Year||Machine A savings||Machine A cumulative savings||Machine B savings|
|Formula:||=Year + (Cumulative return greater than initial outflow-initial outflow)/(Cumulative return greater than initial outflow-Cumulative return for the previous year)|| 6 years, since the Machine A is able to |
cover the investment in 6 years.
|4 years, since the Machine A is able to cover the investment in 6 years.|
| Since, Machine B is able to recover its |
expenses in just 4 years.
Answer a. According to the Payback period method, the best option is Machine B since it is able to recover its expenses in just 4 years but Machine A in 6 years.
Answer b. If the company requires a 3 year or shorter period, both the machines are not feasible since in Machine B also atleast 4 years is required to recover the cost.
The other factors that might influence investment decision are as follows:
i. Rate of return on investment;
ii. Long-term useful life of the machine and the ability to generate revenue;
iii. Salvage value of each machines;