Final answer:
The cash payback period for Novak Corp.'s equipment purchase is approximately 2.1 years, calculated by accumulating the net annual cash flows until the initial investment is fully recovered.
Step-by-step explanation:
The cash payback period is a financial metric used to determine the time it takes for a project to generate enough cash flows to recover its initial investment. In the case of Novak Corp., which is considering the purchase of a piece of equipment costing $30,000, we need to calculate this period based on the projected net annual cash flows over the equipment's life, which are:
- Year 1: $17,000
- Year 2: $10,000
- Year 3: $25,000
- Year 4: $8,000
To calculate the cash payback period, we accumulate the cash flows year by year until the initial investment is recovered.
- After Year 1: $17,000 (Remaining balance: $13,000)
- After Year 2: $10,000 (Accumulated: $27,000; Remaining balance: $3,000)
- By Year 3, the cumulative cash flow will exceed the initial investment of $30,000.
Since the remaining balance after two years is $3,000 and Year 3 adds $25,000, the payback period occurs during Year 3. To be more precise, divide the remaining balance by the Year 3 cash flow ($3,000 / $25,000) to find out the exact fraction of the year needed to complete the payback. It comes to 0.12 of the third year. Therefore, the cash payback period is 2 years plus 0.12 of the next year, which is approximately 2.1 years.