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(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine...

(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $420,000 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 $61,000 $145,000
Year 2 $67,000 $151,000
Year 3 $78,000 $162,000
Year 4 $41,000 $125,000
Year 5 $83,000 $167,000


Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period of this investment is closest to:

5.0 years

2.8 years

3.2 years

1.9 years

Solutions

Expert Solution

Answer: 2.8 years

Explanation

Calculation of Pay Back Period
Year Cash Inflow Cumulative Net  
(Out Flow) ($) Cash Inflow (Out Flow) ($)
0                                 (420,000.00)                         (420,000.00)
1                                  145,000.00                         (275,000.00)
2                                  151,000.00                         (124,000.00)
3                                  162,000.00                            38,000.00
4                                  125,000.00                          163,000.00
5                                  167,000.00                          330,000.00
Payback period = 2nd year + (124,000 / 162,000)
= 2.8 years

ekkarill92 answered 1 year ago
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