A machine will cost $80,000. It has an expected life of 4 years with an anticipated scrap value of $10,000. Expected net operating cash inflows each year are as follows: Yr1 120,000 Yr2 230,000 Yr3 340,000 Yr4 410,000 Required: Calculate the payback period of the project.
Question
A machine will cost 10,000. Expected net operating cash inflows each year are as follows: Yr1 120,000 Yr2 230,000 Yr3 340,000 Yr4 410,000
Required: Calculate the payback period of the project.
Solution
To calculate the payback period of the project, we need to determine how long it will take for the cumulative net operating cash inflows to equal or exceed the initial cost of the machine.
Step 1: Calculate the cumulative net operating cash inflows for each year.
- Year 1: $120,000
- Year 2: 230,000 = $350,000
- Year 3: 340,000 = $690,000
- Year 4: 410,000 = $1,100,000
Step 2: Determine the year in which the cumulative net operating cash inflows equal or exceed the initial cost of the machine.
- The cumulative net operating cash inflows exceed $80,000 in Year 3.
Step 3: Calculate the payback period.
- The payback period is the time it takes to recover the initial cost of the machine.
- In this case, the payback period is 3 years.
Therefore, the payback period of the project is 3 years.
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