For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life is expected to generate operating income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years.

Question

Quizplus · Accepted Answer

The cash payback period is calculated by summing the net cash inflows until the initial investment is recovered. In this case, by the end of Year 4 ($90,000 + $85,000 + $75,000 + $75,000 = $325,000), the initial investment of $500,000 has not been fully recovered. By adding the Year 5 inflow ($75,000), the total inflow reaches $400,000, which still does not recover the initial $500,000 investment, indicating the payback period is longer than 5 years.

For Years 1-5, a Proposed Expenditure of $500,000 for a Fixed