Please show steps Question 1 Christopher Electronics bought new machinery for $5

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Question 1

Christopher Electronics bought new machinery for $5,150,000 million. This is expected to result in additional cash flows of $1,210,000 million over the next 7 years. What is the payback period for this project? Their acceptance period is five years.

Question 2

AMP, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $562,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Payback Period = Initial Investment/Constant Annual Cash Inflows = 5150000/1210000 = 4.26 Years

Since acceptance period is 5 years, we would take 4.26 Years as the payback period.

Part B:

The company will recover the initial investment of 2165800 as follows:

Year 1 Cash Inflow = 424386

Year 2 Cash Flow = 512178

Year 3 Cash Flow = 562755

and the balance of 2165800 - (424386 + 512178 + 562755) = 666481 between Year 3 and Year 4

Payback Period = 3 + 666481/764997 = 3.87 Years

Since acceptance period is 4 years, we would take 3.87 Years as the payback period.

Thanks.

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