Question

Hayden Company is considering the acquisition of a machine that costs $324,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $100,000, and annual operating income of $85,000. What is the estimated cash payback period for the machine (round to one decimal points)?

Answer 1

Cash payback period= 3.2 years.

Step-by-step explanation:

Lets first understand what a cash payback period is. As the name suggest, payback period is the time duration within which a business recovers it's investment and/or capital investment and the payback period is expressed in number of years. The formula for payback period is as follows:

Payback period= initial investment ÷ annual cash-flows

In the question annual operating income is given just for distraction.

payback period = $324000 ÷ 100000

payback period= 3.2 years.

This means if Hayden company decides to invest in the machine, it would recover the cost of machine (i.e it's investment) in approximately three and half years.