Banderas Corporation is considering the purchase of a machine that would cost
79,000. By reducing labor and other operating costs, the machine would provide annual cost savings of
12,871 –
35,692 $63,352
The Correct Answer and Explanation is:
To determine whether Banderas Corporation should purchase the machine, we need to evaluate its cost against the expected annual cost savings. The cost of the machine is $79,000, and the annual savings it provides is $12,871.
To assess whether the investment is worthwhile, a common approach is to calculate the payback period — the time it takes for the savings to repay the initial investment. This is done by dividing the cost of the machine by the annual savings:
Payback Period = $79,000 / $12,871 ≈ 6.14 years
This means it would take a little over six years for the company to recover its investment in the machine. Whether this is a good investment depends on the expected useful life of the machine and the company’s required payback period or internal rate of return.
Now, regarding the numbers $35,692 and $63,352, we assume they are alternative savings figures under different scenarios. Let’s briefly evaluate them:
- If the machine saves $35,692 annually, then the payback period becomes:
$79,000 / $35,692 ≈ 2.21 years - If the machine saves $63,352 annually, then the payback period becomes:
$79,000 / $63,352 ≈ 1.25 years
Clearly, higher savings significantly shorten the payback period, making the investment more attractive.
Correct Answer: $63,352
This figure represents the highest cost savings, which implies the most favorable financial return. If this estimate is realistic and achievable, then the machine is a strong investment due to its short payback period and potential to deliver substantial savings over time. However, if this number is optimistic and the actual savings are closer to $12,871, the long payback period may not justify the investment. Therefore, Banderas Corporation should carefully evaluate the assumptions behind these estimates before making a decision.
