Question

Rihanna Company is considering purchasing new equipment for $379,200. It is expected that the equipment will produce net annual cash flows of $48,000 over its 10-year useful life. Annual depreciation will be $37,920. Compute the cash payback period.

Answer 1

The cash payback period for Rihanna Company to recoup the cost of the new equipment, which is $379,200, through net annual cash flows of $48,000, is calculated to be 7.9 years.

Step-by-step explanation:

The cash payback period is a financial metric used to determine the time it takes for an investment to generate cash flows sufficient to recoup the initial investment cost. In this case, Rihanna Company is considering purchasing new equipment for $379,200. To calculate the cash payback period, we must consider the net annual cash flows, which in this scenario amount to $48,000 (ignoring depreciation, as it is a non-cash expense and does not affect the cash flow).

To find the cash payback period, we divide the cost of the equipment by the annual cash flows:

Cash Payback Period = Equipment Cost / Annual Cash Flows

Cash Payback Period = $379,200 / $48,000

Thus, the cash payback period for the equipment is 7.9 years (rounded to one decimal place).