Planning for capital investments is an important function of management. You are

Question

Planning for capital investments is an important function of management. You are responsible for considering purchasing new equipment for $450,000. It is expected that the equipment will produce net annual cash flows of $55,000 over its 10-year useful life. Annual depreciation will be $45,000. Compute the cash payback period. (1) Explain the pros and cons of using this method to evaluate a capital expenditure (10 points) and (2) show all computations required to arrive at the correct solution.

Explanation / Answer

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks Cash payback period = 450000/55000 = 8.18 years a) Pros - > It tells you when you will get your initial investment back cons - > No discounting. and it does not consider cash flows after the payback period.

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