Question

Mint Company is considering purchasing a machine with a cost of $10,000 and a useful life of 20 years. Mint expects the machine to produce net annual cash flows of $2,000 each year. What is the cash pay-back period of the machine? A) 2 years B) 5 years C) 10 years D) 0.20 years

Answer 1

Answer:

B) 5 years

Explanation:

Year  Cash outflow   Cash inflow   Balance

 0          (10,000.00)           -             (10,000.00)

 1                   -                  2,000.00   (8,000.00)

 2                   -                  2,000.00   (6,000.00)

 3                   -                  2,000.00   (4,000.00)

 4                   -                  2,000.00   (2,000.00)

 5                   -                  2,000.00           -    

All amounts above are stated in $.

From the table above, it will take 5 years to pay back.

The right option is B) 5 years.