Question

Brutus Inc is considering the purchase of a new machine for $500,000. It is expected that the equipment will generate annual cash inflows of $100,000 and annual cash outflows of $37,500 over its 10 year life. Annual depreciation is $50,000. Compute the cash payback period.

Answer 1

8 years

Step-by-step explanation:

Given: Cost of new machine= $500000.

Annual cash inflow= $100000.

Annual cash outflow= $37500.

First, we will calculate annual payback or cash inflow.

Annual payback=
`(cash\ inflow - cash\ outflow)`

∴Annual payback=
`(\$ 100000 - \$ 37500)= \$ 62500`

Now computing cash payback period.

Cash payback period=
`(initial\ investment)/(annual\ payback)`

Cash payback period=
`(500000)/(62500) = 8\ yrs`

∴ Cash payback period is 8 years.

When payback period is short then investment is more attractive.