Question

An anticipated purchase of equipment for $1,000,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: Year Net Income Net Cash Flow 1 $210,000 $400,000 2 180,000 320,000 3 145,000 280,000 4 125,000 270,000 5 60,000 220,000 6 60,000 220,000 7 60,000 220,000 8 60,000 220,000 What is the cash payback period

Answer 1

3 years

Step-by-step explanation:

The Payback period calculates the amount of time it takes to recover the amount invested in a project from its cumulative net cash flows cash flows.

The amount invested is $-1,000,000

In year 1, the amount recovered is $400,000, leaving $-1,000,000 + $400,000 = $-600,000.

In year 2, the amount recovered is 320,000, leaving $-600,000 + 320,000 = -280,000

In year 3, the amount recovered is $280,000, leaving $-280,000 + 280,000 = 0.

The total amount invested is recovered in three years.

The Payback period is 3 years.

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