Question

Bob Jensen incorporated purchased a $600,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. The machine is expectto have a 10 year useful life with no salvage value. Jensen uses straight- line depreciation. The net cash inflow is expected to be $138,000 each year for 10 years. Jensen uses a 12% discount rate in evaluating capital investments. Assume, for simplicity that MACRS depreciation rules do not apply.

Required: The present value payback period in years of the proposed investment under the assumption that cash inflows occur evenly throughout the year. (Note: because of this assumption, the present value calculations will be approximate, not exact.) Do not round intermediate calculations. Round your final answer to 1 decimal place.

Answer 1

Answer: 4.2 years

Step-by-step explanation:

The present value payback period can be calculated by finding the present value of cash inflows for each year and then adding them up until the initial investment is recovered.

Given that Jensen uses a 12% discount rate in evaluating capital investments and uses straight-line depreciation, the present value payback period can be calculated as follows:

Year 1: PV = $138,000 / (1 + 0.12)^1 = $123,214.29

Year 2: PV = $138,000 / (1 + 0.12)^2 = $109,837.61

Year 3: PV = $138,000 / (1 + 0.12)^3 = $97,916.12

Year 4: PV = $138,000 / (1 + 0.12)^4 = $87,160.45

Year 5: PV = $138,000 / (1 + 0.12)^5 = $77,314.09

Year 6: PV = $138,000 / (1 + 0.12)^6 = $68,155.57

Year 7: PV = $138,000 / (1 + 0.12)^7 = $59,488.55

Year 8: PV = $138,000 / (1 + 0.12)^8 = $51,148.49

Year 9: PV = $138,000 / (1 + 0.12)^9 = $43,000.23

Year 10: PV = $138,000 / (1 + 0.12)^10 = $35,916.74

The present value payback period is the time required to recover the initial investment. In this case, the initial investment is $600,000.

Therefore, the present value payback period is calculated as follows: PV payback period = 4 + ($600,000 - $417,972.17) / $493,221.83 = 4.2 years (rounded to 1 decimal place).

Therefore, the present value payback period in years of the proposed investment under the assumption that cash inflows occur evenly throughout the year is 4.2 years.