Question

Vandezande Inc. is considering the acquisition of a new machine that costs $435,000 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 (Ignore income taxes.):

	Incremental Net Operating Income			Incremental Net Cash Flows
Year 1	$	76,000		$	155,000
Year 2	$	82,000		$	161,000
Year 3	$	93,000		$	175,000
Year 4	$	56,000		$	158,000
Year 5	$	98,000		$	160,000

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

The payback period of this investment is closest to:

Answer 1

Year	Cash flows	Cumulative Cash flows
0	$                          -4,35,000	-4,35,000
1	$                            1,55,000	-2,80,000
2	$                            1,61,000	-1,19,000
3	$                            1,75,000	56,000
4	$                            1,58,000	2,14,000
5	$                            1,60,000	3,74,000
Payback Period is the time up to which cost of project is recovered back.
	Payback Period	=	2+(119000/175000)
		=	2.68 Years