Question

Vandezande Inc. is considering the acquisition of a new machine that costs $432,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):

Answer 1

Answer:

Vandezande Inc. is considering the acquisition of a new machine that costs $432,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):

Incremental Net Operating IncomeIncremental Net Cash Flows

Year 1$73,000​ $151,000​

Year 2$79,000​ $158,000​

Year 3$90,000​ $175,000​

Year 4$53,000​ $155,000​

Year 5$95,000​ $157,000​

Assume cash flows occur uniformly throughout a year except for the initial investment.The payback period of this investment is closest to:

A. 4.3 years

B. 2.7 years

C. 2.1 years

D. 5.0 years

Explanation:

Incremental Net Cash Flows              Cumulative Cash Flows

Year 1               $151,000​             ​              ​  $151,000                            

Year 2             ​ $158,000             ​              ​ $309,000

Year 3             ​ $175,000​              ​              ​$484,000

Year 4              $155,000​              ​              ​$639,000

Year 5              ​$157,000​              ​              ​$796,000

The Payback Period is after year 2 but before the end of year 3. The remaining cost after Year 2 is $432,000 - $309,000 = $123,000

The Payback Period = 2 years + $\frac{123000}{175000}$

The Payback Period = 2 years + 0.7 = 2.7 years