Question

Major Corp. is considering the purchase of a new machine for $5,000 that will have an estimated useful life of five years and no salvage value. The machine will increase Major's after-tax cash flow by $2,000 annually for five years. Major uses the straight-line method of depreciation and has an incremental borrowing rate of 10%. The present value factors for 10% are as follows:Ordinary annuity with five payments 3.79Annuity due for five payments 4.17Using the payback method, how many years will it take to pay back Major's initial investment in the machine?

Answer 1

payback 2.5 years

Step-by-step explanation:

the payback will be the point in time at which the project cash flow equal the invesmtent.

This method do not consider the time value of money so we don't have to adjust any period cashflow or outflow.

investment: 5,000

increase in cash-flow 2,000

Investment/cash flow = 5,000 / 2,000 = 2.5 years

The depreciation are not considered as this are not cash flow.