The Whispering Winds Company is planning to purchase $612,800 of equipment with
ID: 2536152 • Letter: T
Question
The Whispering Winds Company is planning to purchase $612,800 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment.
Year Projected Cash Flows
1 $261,000
2 176,600
3 126,900
4 82,800
5 82,800
6 53,500
7 53,500
Total $837,100
(a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year.
Payback period
years and
months.
(b) If Whispering Winds requires a payback period of three years or less, should the company make this investment?
The company
should not
should
make this investment.
Explanation / Answer
Year Cash flows Cumulative Cash flows 0 -612800 -612800 1 261000 -351800 2 176600 -175200 3 126900 -48300 4 82800 34500 5 82800 117300 6 53500 170800 7 53500 224300 a Payback period = 3+(48300/82800)= 3.6 b The company should not make this investment.
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