Question

Rihanna Company is considering purchasing new equipment for $578,500. It is expected that the equipment will produce net annual cash flows of $65,000 over its 10-year useful life. Annual depreciation will be $57,850. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)
Cash payback period _________ years

Answer 1

Answer:

The cash payback period is 8.9 years.

Explanation:

This can be calculated using the following formula:

Cash payback period = Equipment cost / Annual net cash inflows ...............(1)

Where;

Equipment cost = $578,500

Net annual cash flows = $65,000

Substituting the values into equation (1), we have:

Cash payback period = $578,500 / $65,000

Cash payback period = 8.9 years

Note that the net annual cash flows is obtained after the annual cash ouflows is deducted from the annual cash inflows. Since annual depreciation is already part of the annual cash outflows, there is no need to consider it again in our calculation.