(Ignore income taxes in this problem.) Steinmann Inc. is considering the acquisition of a new machine that costs $410,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are:
-The payback period of this investment is closest to:

Question

(Ignore income taxes in this problem.) Steinmann Inc. is considering the acquisition of a new machine that costs $410,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are: 
-The payback period of this investment is closest to:

Quizplus · Accepted Answer

The payback period is the amount of time required to recover the initial investment. To calculate the payback period, we need to find at what time the cumulative net cash inflows equal to or exceed the initial investment.

Year 1: $80,000
Year 2: $100,000
Year 3: $120,000
Year 4: $140,000
Year 5: $160,000

Cumulative net cash inflows: 
Year 1: $80,000
Year 2: $180,000
Year 3: $300,000
Year 4: $440,000
Year 5: $600,000

Payback Period = 2 + ($110,000/$120,000) 
= 2.92 years

The payback period for this investment is 2.92 years which is closest to Choice C - 3.1 years. Therefore, the best choice for the payback period is C.

(Ignore Income Taxes in This Problem