An anticipated purchase of equipment for $580,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: What is the cash payback period?

Question

An anticipated purchase of equipment for $580,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:  What is the cash payback period?

Quizplus · Accepted Answer

The cash payback period is the amount of time it takes to recover the initial investment in cash. To calculate the cash payback period, we need to accumulate the net cash flows until they equal the initial investment.

Year 1: $80,000
Year 2: $100,000
Year 3: $120,000
Year 4: $150,000
Year 5: $200,000
Year 6: $220,000
Year 7: $240,000
Year 8: $270,000

Cumulative cash flows:
Year 1: $80,000
Year 2: $180,000
Year 3: $300,000
Year 4: $450,000
Year 5: $650,000
Year 6: $870,000
Year 7: $1,110,000
Year 8: $1,380,000

The cash payback period is the fourth year, since the cumulative cash flows equal the initial investment of $580,000 in that year. Therefore, the best choice is C.

An Anticipated Purchase of Equipment for $580,000, with a Useful