Question

Brutus Inc is considering the purchase of a new machine for $500,000. It is expected that the equipment will generate annual cash inflows of $100,000 and annual cash outflows of $37,500 over its 10 year life. Annual depreciation is $50,000. Compute the cash payback period.

Answer 1

Answer:

8 years

Explanation:

Given: Cost of new machine= $500000.

           Annual cash inflow= $100000.

           Annual cash outflow= $37500.

First, we will calculate annual payback or cash inflow.

Annual payback= $(cash\ inflow - cash\ outflow)$

∴Annual payback= $(\ 100000 - \ 37500)= \ 62500$

Now computing cash payback period.

Cash payback period= $\frac{initial\ investment}{annual\ payback}$

Cash payback period= $\frac{500000}{62500} = 8\ yrs$

∴ Cash payback period is 8 years.

When payback period is short then investment is more attractive.