The management of Hence Corporation is considering the purchase of a new machine costing $200,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years 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: $\begin{array}{|l|l|l|}
\hline\text { Net } & \text { Income from } \
\text { Cash }\
\hline\text { Flow }& \text {Operations }&\text { Year }\
\hline \$ 90,000 & \$ 50,000 & 1 \
\hline 10,000 & 20,000 & 2 \
\hline 50,000 & 10,000 & 3 \
\hline 45,000 & 5,000 & 4 \
\hline 45,000 & 5,000 & 5 \
\hline
\end{array}$
The cash payback period for this investment is:

Question

The management of Hence Corporation is considering the purchase of a new machine costing $200,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years 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: $\begin{array}{|l|l|l|}
\hline\text { Net } & \text { Income from } \
\text { Cash }\ 
\hline\text { Flow }& \text {Operations }&\text { Year }\
\hline \$ 90,000 & \$ 50,000 & 1 \
\hline 10,000 & 20,000 & 2 \
\hline 50,000 & 10,000 & 3 \
\hline 45,000 & 5,000 & 4 \
\hline 45,000 & 5,000 & 5 \
\hline
\end{array}$
 The cash payback period for this investment is:

Quizplus · Accepted Answer

The cash payback period is the time it takes for the initial investment to be recovered from the net cash flows. In this case, the cumulative cash flows are $90,000 in year 1, $100,000 in year 2, and $150,000 in year 3. The initial investment of $200,000 is not fully recovered until after year 3, so the payback period is between 3 and 4 years. However, since the question asks for the closest whole year, the answer is 3 years.

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