Question

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability:

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

The cash payback period for this investment is

a. 5 years
b. 4 years
c. 2 years
d. 3 years

Answer 1

The correct answer is Option B.

Step-by-step explanation:

According to the scenario, computation of the given data are a follows:

Investment = $490,000

So, we can calculate the cumulative cash flow by using following method:

Year Net cash flow Cumulative cash flow

1 $180,000 $180,000

2 $120,000 $300,000

3 $100,000 $400,000

4 $90,000 $490,000

5 $120,000 $610,000

Since, after 4 years the investment and net cash flow both are $490,000

Therefore, Payback period = 4 years

Answer 2

b. 4 years

Step-by-step explanation:

The cash payback period calculates how long it takes for the amount invested in a project to be recovered from the cumulative net cash flows.

The total amount invested = - $490,000

In year 1, $180,000 is recovered. The amount remaining of the money invested is - $490,000 + $180,000 = $-310,000

In year 2, $120,000 is recovered. The amount remaining of the money invested is $-310,000 + , $120,000 = $-190,000

In year 3, $100,000 is recovered 100,000. The amount remaining of the money invested is $-190,000 + 100,000 = $-90,000

In year 4, $90,000 is recovered. The amount remaining of the money invested is $-90,000 + $90,000 = 0

The amount invested is recovered in 4 years. This is the cash payback period.

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