Question

If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is:__________.

A) 8 years.
B) 7 years.
C) 6 years.
D)5 years.

Answer 1

Answer:A) 8 years

Step-by-step explanation: For every business, the shorter the payback period, the more attractive the investments and the longer the payback period the less attractive such investment is.

Payback period is the time in which the initial cost of an investment is able to be recouped through inflow of cash generated by such investment.

It is calculated as cost of the initial investment divided by the annual cash flow. ie

Cash Payback Period= Initial Investment/ Annual Cash flow

= 16,000/ 2000

= 8 years