5. Evans Company is considering rebuilding and selling used alternators for auto

Question

5. Evans Company is considering rebuilding and selling used alternators for automobiles The company estimates that the net cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows: $100,000 $(30,000) 2$110,000 Year 11 Year 12.. In addition, Evans Company would need to purchase equipment costing $275,000. The equipment would have a 12-year life and a $25,000 salvage value. The company's required rate of return is 10%. The payback period on this investment is: A) 3.00 years B) 2.75 years C) 1.50 years D) 4.00 years 9

Explanation / Answer

Solution: 2.75 years

Working:

Cash inflows

Payback period

1st year

100,000

100,000

1

2nd year

100,000

100,000

1

3rd year

100,000

75,000

0.75

275,000

2.75

Cash inflows

Payback period

1st year

100,000

100,000

1

2nd year

100,000

100,000

1

3rd year

100,000

75,000

0.75

275,000

2.75

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