Your company evaluates proposals using a 4-year payback period guideline [that is, projects must have a payback of 4 years or less in order to be recommended]. You are investigating two alternatives for a new routing machine. Alternative-I has a first cost of $10,000, will last ten years, and will save the company $2,000 in Year-1 and $1,500 in both Year-2 and Year-3. Alternative-II costs $15,000, will also last ten years, and will save $7,000 in Year-1, and 3,000 in Year-2. Assume an MARR of 10%.
(a) What minimum savings in Year-4 are needed to make Alternative-I an acceptable project using Simple Payback Period Method?
(b) If the savings in Year-3 and Year-4 for Alternative-II will be equivalent, what size would they have to be in order for the project to be acceptable using the Discount Payback Period Method?