Question

An anticipated purchase of equipment for $500,000, 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 $120,000 2 50,000 110,000 3 50,000 110,000 4 40,000 100,000 5 40,000 60,000 6 40,000 60,000 7 40,000 60,000 8 40,000 60,000 What is the cash payback period?

Answer 1

Answer:

5 years

Explanation:

The Cash payback period is the period taken for the cumulative inflows from an investment to be equivalent  to the amount invested.

Using the table below,

Period Cash outflows Cash inflows     Cumulative Balance

Year 0  (500,000.00)                  -                  (500,000.00)

Year 1           -                     120,000.00       (380,000.00)

Year 2           -                     110,000.00       (270,000.00)

Year 3           -                     110,000.00       (160,000.00)

Year 4           -                     100,000.00       (60,000.00)

Year 5           -                      60,000.00                  -    

Year 6           -                      60,000.00        60,000.00  

Year 7           -                      60,000.00        120,000.00  

Year 8           -                      60,000.00        180,000.00  

From the table above, the cumulative balance is nil at year 5. Hence the payback period is 5 years.