578 Chapter 14 Evaluating Projected Cash Flows
He currently pays $1,500 per year for his health insurance coverage. His employer offers another plan, which costs
$1,950 per year, but would have a $10 doctor’s visit copay and a $5 copay for all of his prescriptions.
Calculate the payback period if Jude switches to the higher premium and lower copayment plan. Is it fi nancially
worthwhile for him to do so?
C. Grab Bag
- A snowplow service charges $15 per visit or $120 for the entire winter. If there is a very snowy winter and the plow
needs to visit 21 times, how much would you have saved by choosing to pay for the whole season at once? - Cattarauqua Ginseng Enterprises is considering switching to new packaging equipment that would allow it to package
its products more quickly and with less expensive packaging materials. The new equipment would cost $72,500, but
the company estimates that it would save $14,575 worth of labor and materials costs annually. If the equipment can be
expected to last 25 years, how much in total savings would switching to the new equipment yield? - Suppose that your company contracts its computer support to an outside company. The support company charges $107
an hour, but offers two discount plans. With the Dynamic Discount Plan, you would pay a $2,000 annual fee, but then
pay only $60 per hour of tech support. With the Comprehensive Coverage Program, you pay $6,000 annually, but are
then billed just $17.50 per hour.
Calculate the payback period for each of these discount plans. Which has the shorter payback period compared to just
paying by the hour? (See Exercises 16 to 17 for a continuation of this exercise).
D. Additional Exercises
- Suppose that the tech support company from Exercise 15 also offers an Unlimited Limited Plan, which costs $10,000
per year but provides up to 80 hours of free support per year, with additional hours beyond this billed at $20 per hour.
Calculate the payback period for this plan compared with paying by the hour. - In Exercise 15, you calculated the payback period for two competing options. Is the plan with the shortest payback
period necessarily the best choice? Explain your reasoning.