Azimuth Company was considering the purchase of equipment. Details on the equipment are as follows: $$\begin{array} { c c r }
\text { Year } & \text { Original Investment } & \text { Cash Flow } \
{ 0 } & \$ 200,000 \
1 & &\$ 40,000 \
2 & & 40,000 \
3 & & 60,000 \
4 & & 40,000 \
5 & & 60,000 \
6 & & 30,000
\end{array}$$ What is the payback period in years, assuming no taxes are paid?

Question

Azimuth Company was considering the purchase of equipment. Details on the equipment are as follows: $$\begin{array} { c c r } 
\text { Year } &  \text { Original Investment } & \text { Cash Flow } \
{ 0 } & \$ 200,000 \
1 & &\$ 40,000 \
2 & & 40,000 \
3 & & 60,000 \
4 & & 40,000 \
5 & & 60,000 \
6 & & 30,000
\end{array}$$ What is the payback period in years, assuming no taxes are paid?

Quizplus · Accepted Answer

The payback period is the time it takes for cumulative cash flows to equal the initial investment. Cumulative cash flows are $40,000 (Year 1), $80,000 (Year 2), $140,000 (Year 3), $180,000 (Year 4), and $240,000 (Year 5). The payback period is between Year 4 and Year 5. By Year 4, $180,000 is recovered, leaving $20,000 to be recovered in Year 5. Since Year 5 provides $60,000, the payback period is 4 + ($20,000/$60,000) = 4.33 years.

Azimuth Company Was Considering the Purchase of Equipment What Is the Payback Period in Years, Assuming No Taxes