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

Question

Business

Gretchen Morse

9 October, 15:14

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

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Answers (1)

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Alice Romero · Answer 1

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