Question

Pfizer Inc., the world’s largest research-based pharmaceutical company, is considering the acquisition of a new machine that costs $350,200 and has a useful life of 6 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.	$46,000	$106,000
Year 2	$31,000	$91,000
Year 3	$50,000	$110,000
Year 4	$48.000	$108,000
Year 5	$35,000	$95,000
Year 6	$30,000	$74,000

The payback period of this investment is closest to:

4.8 years

3.4 years

2.5 years

2.9 years

Answer 1

Answer:- The payback period of this investment is closest to:-3.4 years.

Explanation:- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

When cash inflows are uneven, then calculate cumulative net cash flow for each period and

Then use the following formula for payback period:

Payback period =A+B/C Where:- A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A

Payback period =3 +($43200/$108000)

                          =3 +.4 =3.4 years

Pfizer Inc.
Calculation of Payback Period
Year	Cash Flow	Cumulative cash flow
0	-350200	-350200
1	106000	-244200
2	91000	-153200
3	110000	-43200
4	108000	64800
5	95000	159800
6	74000	233800