Putter Inc. requires all capital investment projects to have a payback period of 4 years or less. Putter is currently considering an equipment purchase that has an initial cost of $80,000. The equipment is expected to have a six year life and a salvage value of $4,000. 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 meet the payback period of 4 years, the total cash flow over those years needs to cover the initial cost of $80,000. Dividing $80,000 by 4 years gives an annual cash flow requirement of $20,000.