Chaz Denver Company has identified that the cost of a new computer will be $40,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is

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Business

Tyrone

13 April, 19:51

Chaz Denver Company has identified that the cost of a new computer will be $40,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is

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Deon Arellano · Answer 1

The formula for cash payback period is

Initial Investment/Net cash inflow from the investment

So in this case the initial investment is $40,000 and the cash flow increased by the computer is $5,000 so in order to find the cash payback period we will divide 40,000 by 5,000

40,000/5,000=8

The cash payback period is 8 years for the investment in the computer

In this case we ignored the depreciation expense as it is a non cash expense.