The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this situation: The cash payback period for this investment is

Question

The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this situation:​  The cash payback period for this investment is

Quizplus · Accepted Answer

To calculate the cash payback period, we need to determine how long it will take to recover the initial investment through cash inflows.

The initial investment is $400,000. Let's calculate the cash inflows for each year:

Year 1: $100,000 
Year 2: $150,000 
Year 3: $120,000 
Year 4: $80,000 
Year 5: $50,000

To calculate the cumulative cash inflows, we add up the cash inflows for each year until we reach the initial investment:

Year 1: $100,000 
Year 2: $250,000 
Year 3: $370,000 
Year 4: $450,000

Therefore, the cash payback period is 4 years.

However, we also need to consider the desired rate of return of 10%. To determine whether the investment is acceptable, we need to calculate the net present value (NPV) of the cash inflows.

NPV = (100,000/1.1) + (150,000/1.1^2) + (120,000/1.1^3) + (80,000/1.1^4) + (50,000/1.1^5) - 400,000
NPV = $23,558

Since the NPV is positive, the investment is acceptable. Therefore, the best choice is D, with a cash payback period of 4 years and a positive NPV.

The Management of Zesty Corporation Is Considering the Purchase of a New