An anticipated purchase of equipment for $600,000, 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 $600,000, 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

To calculate the cash payback period, we add up the annual net cash flows until we reach the initial investment of $600,000.

Year 1:  $90,000 net income + $100,000 depreciation = $190,000 net cash flow 
Year 2:  $110,000 net income + $100,000 depreciation = $210,000 net cash flow 
Year 3:  $130,000 net income + $100,000 depreciation = $230,000 net cash flow 
Year 4:  $140,000 net income + $100,000 depreciation = $240,000 net cash flow 
Year 5:  $150,000 net income + $100,000 depreciation = $250,000 net cash flow 
Year 6:  $160,000 net income + $100,000 depreciation = $260,000 net cash flow

So, the cash payback period is 6 years ($190,000 + $210,000 + $230,000 + $240,000 + $250,000 + $260,000 = $1,380,000, which is greater than the initial investment of $600,000).

Therefore, the best choice is C) 6 years.

An Anticipated Purchase of Equipment for $600,000, with a Useful