For automated painting of car bodies two models of a robotic system—basic and deluxe—are available in the market. For the following cashflows, which one should be selected on the basis of payback period?

Question

Deluxe	Basic	Year
-$70,000	-$50,000	0
$30,000	$20,000	1
$28,500	$20,000	2
$27,000	$20,000	3
$25,500	$20,000	4
$24,000	$20,000	5

Accepted Answer

Since the cash inflow data are not specific about what they represent, we can assume them to be net incomes. The basic model yields a constant annual income of $20,000. We can therefore find its payback period using the standard formula, Equation (5.1). With an investment of $50,000 and annual income of $20,000, payback period for the basic model is:

Payback Period =[latex]\frac{InvestmentCost}{Net Income per Unit Time }[/latex]

[latex]={\$50,000}/{(\$20,000 per year)}[/latex]

= 2.5 years

For the deluxe model, the incomes are variable. So, we use either the tabular or graphical method; both involve the evaluation of cumulative incomes. Following the procedure outlined in Example 5.2 or 5.3, the payback period for the deluxe model is determined to be

[latex]={2+(70,000-58,500)}/{27,000}[/latex]

=2.43 years

Based on the desirability of shorter payback period, the deluxe model should be selected.

Question 5.4: For automated painting of car bodies two models of a robotic...

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