Brandon Company is contemplating the purchase of a new piece of equipment for $45,000.Brandon is in the 30% income tax bracket.Predicted annual after-tax cash inflows from this investment are $18,000,$15,000,$9,000,$6,000 and $3,000 for years 1 through 5 respectively.The firm uses straight-line depreciation with no residual value at the end of five years.The payback period in years (rounded to the nearest 10^th of a year)for this proposed investment is (assume that the cash inflows occur evenly throughout the year):

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to add up the cash inflows until we reach the amount of the initial investment:

Year 1: $18,000
Year 2: $15,000
Year 3: $9,000
Year 4: $6,000
Year 5: $3,000

Total cash inflows: $51,000

To find the payback period, we divide the initial investment by the annual cash inflows:

Payback period = $45,000 / $12,000 = 3.75 years

Since we are asked to round to the nearest 0.5 years, the answer is 3.5 years (option C).

Note: We didn't take into account the income tax bracket or depreciation in this calculation since they don't affect the payback period. However, they would affect the overall profitability of the investment.

Brandon Company Is Contemplating the Purchase of a New Piece