Acc102 Managerial Accounting: E26-2 The Heartland Paper Company is considering the purchase

Acc102 Managerial Accounting

Exercise 26.2 Payback Period
The Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two 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 Incremental Cash Inflows Incremental Cash Outflows Incremental Net Cash Inflows
1 26,000 20,000 6,000
2 27,000 21,000 6,000
3 32,000 26,000 6,000
4 35,000 29,000 6,000
5 34,000 28,000 6,000
6 33,000 27,000 6,000
187,000 151,000 36,000

a. If the machine manufactured by Toledo Tools costs $27,000, what is its 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 payback period? Should Heartland base its decision entirely on this criterion? Explain your answer.
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