3. A new inventory management system for ABC company could be developed at a cost of $280,000. The estimated net operating costs and estimated new benefits over six years of operation would be: Year Estimated Net Operating Costs Estimated New Benefits 0 ($280,000) $0 1 ($6,000) $40,000 2 ($9,800) $80,000 3 ($11,000) $82,000 4 ($14,000) $115,000 5 ($15,000) $120,000 6 ($25,000) $140,000 In your answers to the questions below please show your calculations (i.e., turn in a copy of your calculations or a printout of your MS Excel worksheet). a. What would be the payback period for this investment? (4 points)

Payback period is the time period in which initial investment of the asset recovered from it benefit. In this question $280,000 is initially invested in the system. The recovery schedule of $280,000 is follow

Year Net Operating Costs New Benefits Net Cash Flow Balance

0 ($280,000) $0 ($280,000) ($280,000)

1 ($6,000) $40,000 $34,000 ($246,000)

2 ($9,800) $80,000 $70,200 ($175,800)

3 ($11,000) $82,000 $71,000 ($104,800)

4 ($14,000) $115,000 $101,000 ($3,800)

5 ($15,000) $120,000 $105,000 $101,200

6 ($25,000) $140,000 $115,000 $216,200

First fours years have recovered the amount in the fifth year on $3,800 is recovered against initial investment out of $105,000

So,

Payback period = 4 years + $3,800 / $105,000 = 4.04 years