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Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Tow cutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and (2) Akron Industries. Regardless of which vendor Heartland chooses, the following incremental cash flows are expected to be realized:

Year IncrementalCash Incremental Cash

Inflows Outflows

1....................................................... $26,000 $20,000

2........................................................ 27,000 21,000

3........................................................ 32,000 26,000

4......................................................... 35,000 29,000

5......................................................... 34,000 28,000

6.......................................................... 33,000 27,000

a. If the machine manufactured by Toledo Tools costs $27,000, what is its expected payback period?

b. If the machine manufactured by Akron Industries has a payback period of 66 months, what is its cost?

c. Which of the machines is most attractive based on its respective paybackperiod? Should Heartland base its decision entirely on this criterion? Explain your answer.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9797545

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