Question

The management of Cooper Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0. 909, 0. 826, 0. 751, 0. 683, 0. 621, respectively. In addition to this information, use the following data in determining the acceptability in this situation:

Year Income from Operations Net Cash Flow
1 $100,000 $180,000
2 40,000 120,000
3 20,000 100,000
4 10,000 90,000
5 10,000 90,000

The cash payback period for this investment is: ___________

Answer 1

3.2 years

Step-by-step explanation:

Cash payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Amount invested = -420,000

Amount recovered in year 1 = -420,000 + 180,000 = -240,000

Amount recovered in year 2 = -240,000 + 120,000 = -120,000

Amount recovered in year 3 = -120,000 + 100,000 = -20,000

Amount recovered in year 4= - 20,000 / 90,000 = 0.22

Cash payback = 3.2 years