Question

Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash flow of $120,000, and annual operating income of $83,721.

What is the estimated cash payback period for the machine?
a. 5 years
b. 5.1 years
c. 4 years
d. 3.5 years

Answer 1

The estimated cash payback period for the machine is d. 3.5 years

Calculating the initial investment: $420,000

Calculating the annual net cash flow: $120,000

The cash payback period is the time it takes for the cumulative net cash inflows to equal the initial investment. We can use the following formula:

Cash Payback Period = Initial Investment / Annual Net Cash Flow

Plugging in the values:

Cash Payback Period = $420,000 / $120,000 = 3.5 years

Therefore, it will take approximately 3.5 years for the machine's net cash inflows to cover the initial investment.