Question

Mora Corporation is evaluating the purchase of a new piece of equipment. The equipment has an initial investment of $60,000. The annual net cash flows over the equipment's 7-year life are estimated to be as follows: Year Annual Net Cash Flow

Year 1 $5,000

Year 2 $10,000

Year 3 $15,000

Year 4 $30,000

Year 5 $50,000

Year 6 $10,000

Year 7 $10,000

What is the cash payback period? Group of answer choices

A. 7 years
B. 5 years
C. 4 years
D. 6 years
E. 3 years

Answer 1

The cash payback period for Mora Corporation's equipment is 4 years, as the cumulative net cash flows reach the initial investment of $60,000 by the end of Year 4.

Step-by-step explanation:

The cash payback period is calculated by adding up the annual net cash flows until the initial investment is recovered. In the case of Mora Corporation and its new piece of equipment, we track the cumulative cash flow over the years:

• Year 1: $5,000
• Year 2: $5,000 + $10,000 = $15,000
• Year 3: $15,000 + $15,000 = $30,000
• Year 4: $30,000 + $30,000 = $60,000

At the end of Year 4, the cumulative net cash flow equals the initial investment of $60,000. Hence, the cash payback period for Mora Corporation's equipment is 4 years, which corresponds to answer choice C.