Baldock Inc. is considering the acquisition of a new machine that costs $426,000 and has a useful...
Question:
Baldock Inc. is considering the acquisition of a new machine that costs $426,000 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 :
| Incremental Net Operating Income | Incremental Net Cash Flows | |
|---|---|---|
| Year 1 | $67,000 | $148,000 |
| Year 2 | $73,000 | $150,000 |
| Year 3 | $84,000 | $175,000 |
| Year 4 | $47,000 | $149,000 |
| Year 5 | $89,000 | $151,000 |
Assume cash flows occur uniformly throughout a year, except for the initial investment.
The payback period of this investment is closest to:
a. 5.0 years
b. 2.7 years
c. 4.3 years
d. 2.1 years
Payback Period:
Payback period analysis is one of the several capital budgeting techniques used by any firm, others being, net present value method, internal rate of return method, simple rate of return method, profitability index method etc. Payback period is the period over which the initial investment gets recovered ignoring the time value of money.
Answer and Explanation: 1
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View this answerThe correct answer to the given question is option b. 2.7 years.
The sum of incremental cash flows for the first two years is given by:
- = $148,000 +...
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