Question

company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year 5). The average operating income generated from the investment over its 5-year life is $20,400. The cash payback period is 3.5 years true false

Answer 1

Answer:

The cash payback period is 3.5 years. The answer is True.

Explanation:

According to the given data we have the following:

Year Cash flows Cumulative Cash flows

0           (90,000)         (90,000)

1            36,000          (54,000)

2            30,000        (24,000)

3            18,000                 (6000)

4            12000               6000

5             6000             12,000

To calculate the cash payback period we use the following formula:

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

Payback period=3+($6,000/$12,000)

Payback period=3.5 years

The cash payback period is 3.5 years. True