Olsen Inc.purchased a $600,000 machine to manufacture a specialty tap for electrical equipment.The tap is in high demand and Olsen can sell all that it could manufacture for the next ten years.The government exempts taxes on profits from new investments in order to encourage capital investments.This legislation most likely will remain in effect in the foreseeable future.The equipment is expected to have ten years of useful life with no salvage value.The firm uses straight-line depreciation.The net cash inflow is expected to be $144,000 each year.Olsen uses a discount rate of 10% in evaluating its capital investments.Assume that cash inflows occur evenly throughout the year.The estimated payback period for this proposed investment,in years,is (rounded to two decimal places):

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how many years it will take to recover the initial investment.
The initial investment is $600,000, and the net cash inflow is $144,000 per year. Therefore, the payback period can be calculated as:

Payback Period = Initial Investment / Annual Cash Inflow
Payback Period = $600,000 / $144,000
Payback Period = 4.17 years (rounded to two decimal places)

Since the payback period is less than the 10-year useful life of the machine, this investment is a good choice for Olsen Inc.

Olsen Incpurchased a $600,000 Machine to Manufacture a Specialty Tap for for Electrical