Asked by samantha rodriguez on Jul 12, 2024
Verified
A company is considering the purchase of a new piece of equipment for $90,000.Predicted annual cash inflows from this investment are $36,000 (year 1) ,$30,000 (year 2) ,$18,000 (year 3) ,$12,000 (year 4) and $6,000 (year 5) .The payback period is:
A) 4.50 years.
B) 4.25 years.
C) 3.50 years.
D) 3.00 years.
E) 2.50 years.
Payback Period
The time it takes for an investment to generate an amount of income or cash flow to recover the cost of the investment, indicating the investment's risk and liquidity.
Annual Cash Inflows
The total amount of money received by a company or individual in a year from various sources, excluding borrowings.
- Understand the significance and methodology for calculating the payback period in investment decisions.
Verified Answer
LS
Lourds SandraJul 13, 2024
Final Answer :
C
Explanation :
To find the payback period, we need to calculate the time it takes for the company to recover the initial investment of $90,000.
Year 1 cash inflow = $36,000
Amount left to recover = $54,000 ($90,000 - $36,000)
Year 2 cash inflow = $30,000
Amount left to recover = $24,000 ($54,000 - $30,000)
Year 3 cash inflow = $18,000
Amount left to recover = $6,000 ($24,000 - $18,000)
Year 4 cash inflow = $12,000
Amount left to recover = $0 ($6,000 - $12,000)
Therefore, the payback period is 3 years and 9 months, or 3.5 years.
The best choice is C, as it has the shortest payback period among the options given.
Year 1 cash inflow = $36,000
Amount left to recover = $54,000 ($90,000 - $36,000)
Year 2 cash inflow = $30,000
Amount left to recover = $24,000 ($54,000 - $30,000)
Year 3 cash inflow = $18,000
Amount left to recover = $6,000 ($24,000 - $18,000)
Year 4 cash inflow = $12,000
Amount left to recover = $0 ($6,000 - $12,000)
Therefore, the payback period is 3 years and 9 months, or 3.5 years.
The best choice is C, as it has the shortest payback period among the options given.
Learning Objectives
- Understand the significance and methodology for calculating the payback period in investment decisions.