For years one through five, a proposed expenditure of $500,000for a fixed asset

Question

For years one through five, a proposed expenditure of $500,000for a fixed asset with a 5-year life has expected net income of$80,000, $70,000, $50,000, $50,000, and $50,000, respectively, andnet cash flows of $180,000, $170,000, $150,000, $150,000, and$150,000, respectively. The cash payback period is 5years.
a. True b. False For years one through five, a proposed expenditure of $500,000for a fixed asset with a 5-year life has expected net income of$80,000, $70,000, $50,000, $50,000, and $50,000, respectively, andnet cash flows of $180,000, $170,000, $150,000, $150,000, and$150,000, respectively. The cash payback period is 5years.
a. True b. False

Explanation / Answer

Payback period measures how many years of profit (net income) arerequired to pay back the initial investment. Cumulative Net Income Yr 1: 80 Yr 2: 150 Yr 3: 200 Yr 4: 250 Yr 5: 300 Since 300 < 500, the initial investment is never paid back andtherefore the payback period is NOT 5 years. The answer isfalse.

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