Question

Fuzzy Tail Industries produces wooden picnic tables for fuzzy creatures (hamster and squirrel size are its most popular products). The company is deciding whether or not to purchase a new machine that would require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 in years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 and 7, and $4,000 for years 8 through 10. The company prefers a payback period of 4 years or less. What is the payback period for this machine

Answer 1

7.5 Years

Step-by-step explanation:

The computation of the payback period of the given machine is shown below:

Year Initial outflow Cash flow Cumulative cash flow

(52000)

1 10,000 10,000

2 10,000 20,000

3 10,000 30,000

4 8,000 38,000

5 8,000 46,000

6 2,000 48,000

7 2,000 50,000

8 4,000 54000

9 4,000 58000

10 4,000 62000

Now the Payback period is

= Completed years+ required cash ÷ annual cash inflow

= 7 years + 2000 ÷ 4000

= 7.5 Years