A company is considering purchasing factory equipment that costs $400,000 and is estimated to have no salvage value at the end of its 5-year useful life.If the equipment is purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000.The straight-line method of depreciation would be used.The cash payback period on the equipment is

Question

Quizplus · Accepted Answer

To calculate the cash payback period, we need to determine how long it will take for the annual cash inflows to cover the initial investment of $400,000.

First, we need to determine the annual depreciation expense:
Depreciation = (Cost - Salvage Value) / Useful Life
Depreciation = ($400,000 - $0) / 5
Depreciation = $80,000 per year

Next, we can calculate the annual cash inflows:
Annual Cash Inflows = Revenues - Operating Expenses - Depreciation
Annual Cash Inflows = $150,000 - $25,000 - $80,000
Annual Cash Inflows = $45,000

Now we can calculate the cash payback period:
Cash Payback Period = Initial Investment / Annual Cash Inflows
Cash Payback Period = $400,000 / $45,000
Cash Payback Period = 8.89 years

Therefore, the cash payback period for the equipment is 8.89 years. However, this is longer than the standard payback period of 3-4 years, so the investment may not be a good choice.

A Company Is Considering Purchasing Factory Equipment That Costs $400,000