Question

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

Year Income from Operations Net Cash Flow
1 $18,750 $93,750
2 18,750 93,750
3 18,750 93,750
4 18,750 93,750
5 18,750 93,750

The cash payback period for this investment is:

A. 4 years
B. 5 years
C. 3 years
D. 20 years

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

Purchase of a new machine costing = $375,000

Company's desired rate of return =  6%

Present value factor for an annuity of $1 at interest of 6% for 5 years = 4.212

Since, the cash inflows are equal cash payback period:

= Initial investment ÷ Annual cash inflows

= $375,000 ÷ $93,750

= 4 years

Therefore, the cash payback period for this investment is 4 years.