Asked by Chantal Taylor on Jun 03, 2024
Verified
Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine?
A) 3.5 years
B) 5 years
C) 5.1 years
D) 4 years
Cash Payback Period
The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment.
Residual Value
The estimated salvage value or end-of-useful life value of an asset after all depreciation has been deducted.
Net Cash Flow
The amount of cash generated or used by a company in a specific period, calculated as cash received minus cash spent.
- Calculate the cash payback period and its relevance in evaluating investment opportunities.
Verified Answer
KC
Kacie CurtisJun 08, 2024
Final Answer :
A
Explanation :
The cash payback period is calculated by dividing the initial investment by the annual net cash flow. Thus, $420,000 / $120,000 = 3.5 years.
Learning Objectives
- Calculate the cash payback period and its relevance in evaluating investment opportunities.