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1) A material initially cost $45000, with scrap value of $12500.
If reworked at a cost of $7500, it could be sold for $17500. What is the incremental effect of reworking and selling the material?Dear Tutor, I’m not sure about the answer. Will you confirm if it is $(2500)?
2) In the BPP book, a disadvantage of simple payback period was:
“The cut-off period for deciding what is acceptable is arbitrary.”
Will you explain what it means?
1. Yes – it is (2,500)
2. The payback period is compared with a limit set by the company – if it is less than the limit then it is worthwhile, if it is more than the limit then it is not worthwhile. There is no rule for fixing the limit – the company decides what limit they want (it is arbitrary).
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