3. Champ Pederson has a fixed amount of money to use to purchase a new machine.

Question

3. Champ Pederson has a fixed amount of money to use to purchase a new machine. The cost of the machine is $85,000. The machine is expected to generate a net after-tax income of $11,000 per year which includes depreciation expense of $4,500. What is the payback period for this machine? Check: Payback period is greater than 4 years.

4. Dr Roberts, Inc. is considering investing a lump sum of $40,000 in a project that would provide the following net cash flows: Year 1 $6,500 Year 2 12,000 Year 3 15,000 Year 4 12,800 Compute the project's payback period. Show your work for credit. Hint: Use the “payback period calculation with uneven cash flows” since this problem has uneven net cash flows. See example in the textbook.

Explanation / Answer

3) payback period initial investment/annual cash flow 85000/(11000+4,500) 5.483871 or 5.49 years inflow total 4) year 1 6,500 6,500 year 2 12,000 18,500 year 3 15,000 33,500 year 4 6500 40,000 6500/12800 0.507813 so 3.507813 or 3.51 years

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