Landmark Company is considering an investment in new equipment costing $360 000. The equipment will be depreciated on a straight- line basis over a five- year life and is expected to generate net cash inflows of $70 000 the first year, $80 000 the second year, and $120 000 every year thereafter until the fifth year. What is the payback period for this investment? The residual value is zero.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. The cumulative cash inflows are $70,000 in year 1, $150,000 in year 2, and $270,000 in year 3. In year 4, an additional $120,000 is received, reaching a total of $390,000. The payback period is 3 full years plus the fraction needed to recover the remaining $90,000 ($360,000 - $270,000) from the $120,000 received in year 4, which is 0.75 years. Thus, the payback period is 3.75 years.

Landmark Company Is Considering an Investment in New Equipment Costing