Question

Vandezande Inc. is considering the acquisition of a new machine that costs $432,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):

Answer 1

Vandezande Inc. is considering the acquisition of a new machine that costs $432,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):

Incremental Net Operating IncomeIncremental Net Cash Flows

Year 1$73,000​ $151,000​

Year 2$79,000​ $158,000​

Year 3$90,000​ $175,000​

Year 4$53,000​ $155,000​

Year 5$95,000​ $157,000​

Assume cash flows occur uniformly throughout a year except for the initial investment.The payback period of this investment is closest to:

A. 4.3 years

B. 2.7 years

C. 2.1 years

D. 5.0 years

Step-by-step explanation:

Incremental Net Cash Flows Cumulative Cash Flows

Year 1 $151,000​ ​ ​ $151,000

Year 2 ​ $158,000 ​ ​ $309,000

Year 3 ​ $175,000​ ​ ​$484,000

Year 4 $155,000​ ​ ​$639,000

Year 5 ​$157,000​ ​ ​$796,000

The Payback Period is after year 2 but before the end of year 3. The remaining cost after Year 2 is $432,000 - $309,000 = $123,000

The Payback Period = 2 years +
`(123000)/(175000)`

The Payback Period = 2 years + 0.7 = 2.7 years