3. A new inventory management system for ABC company could be developed at a cost of $280,000. The estimated net operating costs and estimated new benefits over six years of operation would be: Year Estimated Net Operating Costs Estimated New Benefits 0 ($280,000) $0 1 ($6,000) $40,000 2 ($9,800) $80,000 3 ($11,000) $82,000 4 ($14,000) $115,000 5 ($15,000) $120,000 6 ($25,000) $140,000 In your answers to the questions below please show your calculations (i. e., turn in a copy of your calculations or a printout of your MS Excel worksheet). a. What would be the payback period for this investment? (4 points)

4.04 years / 4 years

Explanation:

Payback period is the time period in which initial investment of the asset recovered from it benefit. In this question $280,000 is initially invested in the system. The recovery schedule of $280,000 is follow

Year   Net Operating Costs   New Benefits   Net Cash Flow   Balance

0         ($280,000)                  $0                     ($280,000)      ($280,000)  

1          ($6,000)                       $40,000           $34,000          ($246,000)

2         ($9,800)                       $80,000           $70,200          ($175,800)

3         ($11,000)                       $82,000           $71,000           ($104,800)

4         ($14,000)                      $115,000          $101,000          ($3,800)

5         ($15,000)                      $120,000         $105,000         $101,200

6         ($25,000)                     $140,000         $115,000          $216,200

First fours years have recovered the amount in the fifth year on $3,800 is recovered against initial investment out of $105,000

So,

Payback period = 4 years + $3,800 / $105,000 = 4.04 years

a

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