Question

A company is considering purchasing factory equipment that costs $528000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $128000 and annual operating expenses exclusive of depreciation expense are expected to be $32000. The straight-line method of depreciation would be used. What is the cash payback period on the equipment?

Answer 1

The cash payback period for the equipment is 5.5 years, calculated by dividing the cost of equipment ($528,000) by the annual cash flow ($96,000).

Step-by-step explanation:

The question is about calculating the cash payback period for factory equipment. To find the cash payback period, we need to consider the annual cash flow generated by the equipment, which can be calculated by subtracting the annual operating expenses from the annual revenues. We do not account for depreciation as it is a non-cash expense, and therefore does not affect the cash flow.

The annual cash flow (revenues - operating expenses) is $128,000 - $32,000, which equals $96,000. Given that the equipment costs $528,000 and has no salvage value, the cash payback period is the cost of the equipment divided by the annual cash flow. Therefore, the cash payback period is $528,000 / $96,000, resulting in 5.5 years.