Question 6 3 pts The cash payback technique should be used as a final screening

Question

Question 6 3 pts The cash payback technique should be used as a final screening tool. can be the only basis for the capital budgeting decision. O is relatively easy to compute and understand. O considers the expected profitability of a project Question 7 3 pts Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $3,000 each year. The cash payback on this investmentis O 7.5 years O 10 years O 15 years 6 years

Explanation / Answer

Question 6.

Answer = is relatively easy to compute and understand

Cash Payback:

Cash Payback is a method in which the capital invested is evaluated by considering the cash flows and the cash payback period. The cash payback period is the expected period of time between the date of investment and the full recovery of cost of investment.

Thus Cash Payback period = Cost of capital investment / Estimated net annual cash flow

In the given question the listed items are the Advantages and Disadvantages of Cash payback.They are as follows

The cash payback technique Advantages are:

1. may be useful as an initial screening tool

2.It may also be the most critical factor in the capital budgeting decision

3.It is easy to compute and understand

Disadvantages:

1.It should not normally be the only basis for the capital budgeting decision as it ignores the profitability of the project

2.It ignores the time value of money

Question 7

Answer = 7.5 years

Explanation: Based on the above formula

Cash Payback on this investment = $90,000 /[$3,000 + ($90,000/10)] = 7.5

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