An anticipated purchase of equipment for $1,200,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: $$\begin{array}{l}
\text { Net Cash}& \text {Net Income Flow}&\text { Year}\
\$ 330,000 & \$ 180,000&1 \
320,000 & 170,000&2 \
780,000 & 130,000&3 \
770,000 & 120,000&4 \
200,000 & 50,000 &5\
200,000 & 50,000&6 \
200,000 & 50,000 &7\
200,000 & 50,000&8

\end{array}$$ What is the cash payback period?

Question

An anticipated purchase of equipment for $1,200,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: $$\begin{array}{l}
\text { Net Cash}& \text {Net Income Flow}&\text { Year}\
\$ 330,000 & \$ 180,000&1 \
320,000 & 170,000&2 \
780,000 & 130,000&3 \
770,000 & 120,000&4 \
200,000 & 50,000 &5\
200,000 & 50,000&6 \
200,000 & 50,000 &7\
200,000 & 50,000&8

\end{array}$$ What is the cash payback period?

Quizplus · Accepted Answer

The cash payback period is the time it takes for the net cash flows to recover the initial investment. The cumulative cash flows are $330,000 (Year 1), $650,000 (Year 2), $1,430,000 (Year 3). By the end of Year 3, the cumulative cash flow exceeds the initial investment of $1,200,000, so the payback period is 3 years.

An Anticipated Purchase of Equipment for $1,200,000, with a Useful