Hayden Company is considering the acquisition of a machine that costs $675,000.The machine is expected to have a useful life of 6 years,a negligible residual value,an annual net cash flow of $150,000,and annual operating income of $87,500.What is the estimated cash payback period for the machine?

Question

Quizplus · Accepted Answer

To calculate the cash payback period, we need to find out how long it will take for the cash inflows to equal the initial investment of $675,000.

Cash inflows per year: $150,000
Cash outflow (initial investment): $675,000

Year 1: $150,000
Year 2: $150,000
Year 3: $150,000
Year 4: $150,000
Year 5: $150,000
Year 6: $150,000

Total cash inflow at the end of Year 4: $600,000
Remaining cash outflow: $675,000 - $600,000 = $75,000

To recover the remaining $75,000, we need an additional:

$75,000 / $150,000 (annual cash inflow) = 0.5 year

Total cash payback period: 4 years + 0.5 year = 4.5 years.

Therefore, the best choice is C) 4.5 years.

Hayden Company Is Considering the Acquisition of a Machine That