The management of Zesty Corporation is considering the purchase of a new machine costing $400,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909,0.826,0.751,0.683,and 0.621,respectively.In addition to the foregoing information,use the following data in determining the acceptability in this situation:
The cash payback period for this investment is

Question

The management of Zesty Corporation is considering the purchase of a new machine costing $400,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909,0.826,0.751,0.683,and 0.621,respectively.In addition to the foregoing information,use the following data in determining the acceptability in this situation: ​
 The cash payback period for this investment is

Quizplus · Accepted Answer

To calculate the cash payback period, we need to divide the initial cost of the machine by the annual net cash inflow. 
Annual net cash inflow can be calculated as the difference between the annual cash inflows and the annual cash outflows.

Let's assume that the annual cash inflows from the machine are $150,000 for 5 years, and the annual cash outflows (for maintenance and operating costs) are $30,000 per year. 
Therefore, the net cash inflow for each year will be $120,000 ($150,000 - $30,000).

To determine the cash payback period, we divide the initial investment ($400,000) by the annual net cash inflow ($120,000). 
Cash payback period = $400,000 ÷ $120,000 = 3.33 years (rounded to 3 years).

Since the cash payback period is less than the desired rate of return of 10%, the investment in the new machine is acceptable. Therefore, the best choice is D.

The Management of Zesty Corporation Is Considering the Purchase of a New