A company is considering purchasing factory equipment that costs $320000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased annual revenues are expected to be $90000 and annual operating expenses exclusive of depreciation expense are expected to be $40000. The straight-line method of depreciation would be used. The cash payback period on the equipment is
A) 3.6 years.
B) 8.0 years.
C) 3.2 years.
D) 6.4 years.

Question

Quizplus · Accepted Answer

The cash payback period is calculated by dividing the initial investment by the annual cash flow. The annual cash flow is the annual revenue minus the annual operating expenses, not including depreciation since it's a non-cash expense. Here, the annual cash flow is $90,000 - $40,000 = $50,000. The initial investment is $320,000. Therefore, the cash payback period is $320,000 / $50,000 = 6.4 years.

A Company Is Considering Purchasing Factory Equipment That Costs $320000