3.9 years 4 years 4.9 years 3 years (Ignore income taxes in this problem.) Baldo

Question

3.9 years

4 years

4.9 years

3 years

(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $435,000 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:

Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period of this investment is closest to:

4.3 years

5.0 years

2.2 years

2.7 years

(Ignore income taxes in this problem.) The Zinger Corporation is considering an investment that has the following data:

Explanation / Answer

Payback period is the period when the investment is covered.

In cases of uneven inflows payback period is calculated as under:

Year Cash outflow Cash inflow Net Cash Flow Cumulative cash flow 1 -15,000 3,400 -11,600 -11,600 2 -4,400 3,400 -1,000 -12,600 3 0 8,000 8,000 -4,600 4 0 5,400 5,400 800 5 0 5,400 5,400 6,200 Payback period = 3 + 4,600/5,400                        = 3.9 years

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