Question

Baldock inc. is considering the acquisition of a new machine that costs $420,000 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: incremental net operating income incremental net cash flows year 1 $61,000 $145,000 year 2 $67,000 $151,000 year 3 $78,000 $162,000 year 4 $41,000 $125,000 year 5 $83,000 $167,000 assume cash flows occur uniformly throughout a year except for the initial investment. the payback period of this investment is closest to: 5.0 years 2.8 years 3.2 years 1.9 years

Answer 1

The payback period will be calculated as –

Year Uncovered Investment (Beginning of Year) Annual Cash flow Time Needed for Payback

1 420,000 145000 1

2 275000 151000 2

3 124000 162000 0.8

Thus, the payback period will be = 2 year + (124,000/162000) = 2.8 years