Question

Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?

Answer 1

The estimated cash payback period for the machine is 4 years.

Cash payback period is a length of time required by an investment to recover its beginning investment value. This period gives a vital information for decision making whether to undertake an investment or not. The machine needs 4 years period to equalize its beginning investment value of $600,000 because it can provide the cash inflow of $150,000 annually, therefore we multiply $150,000 by 4 resulting $600,000.