Question
In: Finance
Sure-Lock Ltd. is purchasing new equipment at a cost of $325,000. The equipment will yield incremental...
Sure-Lock Ltd. is purchasing new equipment at a cost of $325,000. The equipment will yield incremental cash flows of $100,000 in the first year of its operation. After that, the incremental cash flows will decrease at a rate of 10% per year. The equipment is expected to last for 6 years, and will be worthless at the end of its life. What is the payback period of the equipment, given that the required rate of return is 15%?
Solutions
Expert Solution
| Payback period is the time period in which the initial investment is recovered | ||
| Year | Cash flows | Cumulative Cash flows |
| 0 | (325,000) | (325,000) |
| 1 | 100,000 | (225,000) |
| 2 | 90,000 | (135,000) |
| 3 | 81,000 | (54,000) |
| 4 | 72,900 | 18,900 |
| 5 | 65,610 | 84,510 |
| 6 | 59,049 | 143,559 |
| Payback period = 3 + 54000/72900 = 3.74074 years | ||
| i.e. 3.74 years |
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