Question

Brutus Inc is considering the purchase of a new machine for $500,000. It is expected that the equipment will generate annual cash inflows of $100,000 and annual cash outflows of $37,500 over its 10 year life. Annual depreciation is $50,000. Compute the cash payback period.Entry field with correct answerA. 4.44 years.B. 10 years.C. 8 years.D. 5 years.

Answer 1

Annual net cashflow

= Annual cash inflow - Annual cash outflow

= $100,000 - $37,500

= $62,500

Payback period

= Initial outlay/Annual net cashflow

= $500,000/$62,500

= 8 years

Step-by-step explanation:

There is need to calculate the net cashflow by deducting the annual cash outflow from annual cash inflow. Thereafter, we will divide the initial outlay by the net cashflow.