Problem
Traditionally, Granite Company has accepted a proposal only if the payback period is less than 50 percent of the asset's useful life. Peggy Casteel is the new accounting manager. She suggested to management that capital budgeting decisions should not be made based solely on the payback period. Granite Company is currently considering purchasing a new machine for the factory that would cost $112,000 and be sold after 8 years for $50,000. The new machine will generate annual cash flows of $30,000 in its first year of use, $24,000 in its second year of use, $20,000 in the third year, and $14,800 each year thereafter. The company's cost of capital is 12 percent.
Task
I. Complete the table given below.
II. Calculate the payback period.
III. Would Granite Company accept this project based solely on the payback period?
IV. Complete the table given below and calculate NPV.
V. Would Granite Company accept this project if the NPV method is used to evaluate the machine?