Vandezande Incorporated is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.): Assume cash flows occur uniformly throughout a year except for the initial investment.The payback period of this investment is closest to:

Question

Vandezande Incorporated is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):  Assume cash flows occur uniformly throughout a year except for the initial investment.The payback period of this investment is closest to:

Quizplus · Accepted Answer

To calculate the payback period, we need to find the time when the cumulative net cash flows equal the initial investment of $370,000.

Year 1: 
Incremental net cash flow = $100,000
Cumulative net cash flow = $100,000

Year 2: 
Incremental net cash flow = $90,000
Cumulative net cash flow = $190,000

Year 3: 
Incremental net cash flow = $80,000
Cumulative net cash flow = $270,000

Year 4: 
Incremental net cash flow = $70,000
Cumulative net cash flow = $340,000

Year 5: 
Incremental net cash flow = $60,000
Cumulative net cash flow = $400,000

Therefore, the payback period is 3 years + (30,000/80,000) = 3.375 years or approximately 3.1 years to the nearest tenth of a year.

Choice C) is the best answer as it has the closest value to the calculated payback period.

Vandezande Incorporated Is Considering the Acquisition of a New Machine