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:

Panasonics	LG
Initial Outlay	RM 250,000	RM260,000
Year	Expected cash flow
1	RM 80,000	RM 145,000
2	RM 80,000	RM 145,000
3	RM 80,000	RM 145,000
4	RM 80,000	RM 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?

K300i	H550i
Initial Outlay	(RM60,000)	(RM50,000)
Year	Expected cash flow
1	RM15,625	RM40,000
2	RM15,625	RM40,000
3	RM15,625	RM40,000
4	RM15,625	RM40,000
5	RM15,625	RM40,000

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.