Question

Patterson Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $545,000, a 7-year life, and $150,000 salvage value. The increase in cash flow each year of the equipment's life would be as follows:

Year 1 $ 99,000
Year 2 $ 91,000
Year 3 $ 89,000
Year 4 $ 78,000
Year 5 $ 75,000
Year 6 $ 70,000
Year 7 $ 64,000What is the payback period?

Answer 1

6.67 years

Step-by-step explanation:

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

Amount invested = $-545,000

Total cash flows = $502,000

In the first year, $-545,000 + $99,000 = $-446,000 is recovered.

In the second year, $-446,000 + 91,000 = $-355,000 is recovered

In the third year , $-355,000 + $89,000 = $-266,000 is recovered

In the fourth year, $-266,000 + $78,000 = $-188,000 is recovered

In the fifth year, $-188,000 + $75,000 = $-113,000 is recovered

In the sixth year, $-113,000 + $70,000 = -43,000 is recovered

I'm the 7th year, -43,000 + 64,000 = $21,000 is recovered

The total amount in recovered between the 6th and 7th year.

Pay back period = 6 years + 43,000 / 64,000 = 6.67 years

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