Answer:
Vandezande Inc. is considering the acquisition of a new machine that costs $432,000 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 (Ignore income taxes.):
Incremental Net Operating IncomeIncremental Net Cash Flows
Year 1$73,000 $151,000
Year 2$79,000 $158,000
Year 3$90,000 $175,000
Year 4$53,000 $155,000
Year 5$95,000 $157,000
Assume cash flows occur uniformly throughout a year except for the initial investment.The payback period of this investment is closest to:
A. 4.3 years
B. 2.7 years
C. 2.1 years
D. 5.0 years
Explanation:
Incremental Net Cash Flows Cumulative Cash Flows
Year 1 $151,000 $151,000
Year 2 $158,000 $309,000
Year 3 $175,000 $484,000
Year 4 $155,000 $639,000
Year 5 $157,000 $796,000
The Payback Period is after year 2 but before the end of year 3. The remaining cost after Year 2 is $432,000 - $309,000 = $123,000
The Payback Period = 2 years + [tex]\frac{123000}{175000}[/tex]
The Payback Period = 2 years + 0.7 = 2.7 years
