If an asset cost $210,000 and is expected to have a $30,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $30,000 each year, the cash payback period is
A) 8 years.
B) 7 years.
C) 6 years.
D) 5 years.

Question

Quizplus · Accepted Answer

Cash payback period = (Cost of asset - salvage value) / Annual net cash inflow

Cash payback period = ($210,000 - $30,000) / $30,000 per year

Cash payback period = 6 years

Therefore, the cash payback period is 6 years, which means the company will recover its initial investment in the asset in 6 years. However, since the annual net cash inflows are the same in each year, we can also calculate the cash payback period as follows:

Cash payback period = Initial investment / Annual net cash inflow

Cash payback period = $210,000 / $30,000 per year

Cash payback period = 7 years

Therefore, the best choice is B, as it is the closest answer to both calculations.

If an Asset Cost $210,000 and Is Expected to Have