Question

patterson corporation is considering the purchase of a new piece of equipment, which would have an initial cost of $557,000, a 7-year useful life, and $150,000 salvage value. the increase in cash flow each year of the equipment's life would be as follows: year 1 $ 118,000 year 2 110,000 year 3 108,000 year 4 97,000 year 5 94,000 year 6 89,000 year 7 83,000 what is the payback period? multiple choice 4.88 years 5.34 years 5.37 years 5.55 years

Answer 1

The payback period for the Patterson Corporation's new equipment is approximately 5.34 years, which is calculated by summing the cumulative cash flows until the initial investment is recovered.

Step-by-step explanation:

The payback period for the Patterson Corporation's new equipment investment is calculated by adding the cash flows from each year until the initial investment of $557,000 is recovered. To determine the payback period, the cash flows for each year will be summed cumulatively.

1. Year 1: $118,000
2. Year 2: $110,000 (cumulative $228,000)
3. Year 3: $108,000 (cumulative $336,000)
4. Year 4: $97,000 (cumulative $433,000)
5. Year 5: $94,000 (cumulative $527,000)

Since the cumulative cash flow at the end of year 5 is $527,000, which is close to the initial investment, we need to calculate how far into year 6 it would take to cover the remaining $30,000 (i.e., $557,000 initial cost - $527,000 cumulative cash flow).

To do this, we divide the remaining amount by year 6 cash flow: $30,000 / $89,000 = 0.3371 years. Adding this fraction to the 5 completed years, the final payback period is approximately 5.34 years. Therefore, the correct answer to the multiple choice question is 5.34 years.