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Considering capital budgeting, if you were to choose a machine upgrade that will increase productivity, what will your payback period be?

Installed machine purchase option would require a $100,000 loan. This would be considered a capital budgeting project using MACRS 3 year depreciation (not real-life worthy but much easier for our purposes). The efficiency savings is expected to be $35,000 year 1, $60,000, $20,000 years 2-3 respectively. Tax rate 30%. Cost of capital is 9%. The machine can be sold for $20,000 at the end of year 3. NOTE: for non-Excel users I have provided the computation for cash flows below and NPV and IRR results. Excel users is you want to compute on your own as a challenge you can use my computations as a double check. The focus is on the application of the data received.

NPV	CF0	CF1	CF2	CF3
$4,993	($100,000)	$34,499	$55,335	$34,666
IRR
11.76%

Chapters 12,13 Capital Budgeting 3 year			Purchase price	100,000	Installation	0
100,000	Year 1	Year 2	Year 3	Year 4	Terminal value
EBITDA	35,000	60,000	20,000	0	Installed price	100,000
Depr 3 year	0.3333	0.4445	0.1481	0.0741	less acc. depr.	92,590
Depreciation Exp.	33,330	44,450	14,810	0	Book Value	7,410
EBT	1,670	15,550	5,190	0
Tax	501	4,665	1,557	0	Selling price	20,000
EAT	1,169	10,885	3,633	0	less BV	7,410
add depr back	33,330	44,450	14,810	0	Gain	12,590
OCF	34,499	55,335	18,443	0	Taxes owed	3,777
Tax rate	0.3				Selling price	20,000
WACC	9.00%				less tax	3,777
NPV	CF0	CF1	CF2	CF3	Net terminal	16,223
$4,993	($100,000)	$34,499	$55,335	$34,666
IRR
11.76%

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