Richol Corporation is considering an investment in new equipment costing $180,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year,$65,000 the second year,and $90,000 every year thereafter until the fifth year.What is the payback period for this investment? The equipment has no residual value.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. In this case, $45,000 (Year 1) + $65,000 (Year 2) = $110,000. By the end of Year 2, $70,000 is still needed. In Year 3, $90,000 is generated, so $70,000/$90,000 = 0.78 years. Total payback period = 2 + 0.78 = 2.78 years.

Richol Corporation Is Considering an Investment in New Equipment Costing