A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year 5). The average operating income generated from the investment over its 5-year life is $20,400. The cash payback period is 3.5 years.

Question

Quizplus · Accepted Answer

The average operating income is calculated by dividing the total operating income over the 5-year life of the investment by 5. In this case, the average operating income is $20,400. The cash payback period is calculated by dividing the initial investment by the average annual net cash inflow. In this case, the cash payback period is 3.5 years.

A Company Is Considering the Purchase of a New Piece