An anticipated purchase of equipment for $520,000, with a useful life of 8 years
ID: 2537355 • Letter: A
Question
An anticipated purchase of equipment for $520,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:
Year
Net Income
Net Cash Flow
1
$60,000
$90,000
2
50,000
110,000
3
50,000
110,000
4
72,000
100,000
5
72,000
55,000
6
72,000
55,000
7
72,000
40,000
8
72,000
40,000
What is the cash payback period?
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Year
Net Income
Net Cash Flow
1
$60,000
$90,000
2
50,000
110,000
3
50,000
110,000
4
72,000
100,000
5
72,000
55,000
6
72,000
55,000
7
72,000
40,000
8
72,000
40,000
Explanation / Answer
Cash payback period can be defined as the time period required for the project to recoup its entire investment
Since we need to calculate cash payback , we will use cash flows
If we sum up all the cash flows till year 6 = 90000 + 110000 + 110000 + 100000 + 55000 +55000 = 520000 = investment value of project
Hence cash payback period = 6 years