Houis Inc. is considering the acquisition of a new machine that costs $300,000 a

Question

Houis Inc. is considering the acquisition of a new machine that costs $300,000 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 46,000 106,000

Year 231,000 97,000

Year 3 50,000110,000

Year 4 48,000 108,000

Year 5 35,00095,000

The payback period of this investment is closest to:

5.0 years (this one is wrong, i know that atleast)

I need to know how this is calculated??????????

5.0 years (this one is wrong, i know that atleast)

I need to know how this is calculated??????????

Explanation / Answer

Hi,

Please find the answer as follows:

Payback Period =

Year 1 = 106000

+

Year 2 = 97000

Since investment of 300000 will get covered in the Year 3, payback period would be calculated as follows:

2 + (300000 - 106000 - 97000)/110000 = 2.9 Years

Thanks.

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