Payback Period

  1. Purnama Enterprises is considering replacing a hand operated machine with new fully automated machine. The company has two types of machine to choose and they are mutually exclusive. Below are the expected cash flows of both machines:
Initial OutlayRM 250,000RM260,000
YearExpected cash flow
1RM 80,000RM 145,000
2RM 80,000RM 145,000
3RM 80,000RM 145,000
4RM 80,000RM 145,000

Calculate the followings for both machines if the firm’s cost of capital is 12 per cent:

(a) Payback Period (PP)

(b) Net Present Value (NPV)

(c) Profitability Index (PI)

(d) Indicate which machine that the company has to choose?

2. Nooriah Orthodontic Clinic is planning to buy a brand new dental chair in order to enhance the clinic’s service quality. The proposed models are K300i and H550i. The price for each model is RM60,000 for model K300i and RM50,000 for model H550i. Since both models perform the same function, which model will be choosen?

Initial Outlay(RM60,000)(RM50,000)
YearExpected cash flow

Nooriah Orthodontic Clinic requires a minimum rate of return of 10 percent. Calculate:

(a) Payback period

(b) Net present value (NPV)

(c) Profitability Index (PI)

(d) Which model should be chosen by ADC? Explain your answer.

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