Vinson Manufacturing requires all capital investment projects to have a payback period of 5 years or less.Vinson is currently considering an equipment purchase that has an initial cost of $90 000.The equipment is expected to have a 10-year life and a salvage value of $5000.Assuming cash flows are equal,what does the annual cash flow generated by the equipment need to be in order to meet the payback period requirements?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial cost ($90,000) by the expected annual cash flow generated by the equipment. Let's call this annual cash flow X.

Payback period = $90,000 / X

Since the payback period requirement is 5 years or less, we can set up the following equation:

5 years = $90,000 / X

Multiplying both sides by X gives:

5X = $90,000

Dividing by 5:

X = $18,000

Therefore, the annual cash flow generated by the equipment needs to be $18,000 or higher to meet the payback period requirement of 5 years or less. Thus, the best choice is A) $18,000.

Vinson Manufacturing Requires All Capital Investment Projects to Have a Payback