1. Brady Corp. is considering the purchase of a piece of equipment that costs $2

Question

    1. Brady Corp. is considering the purchase of a piece of equipment that costs $23,000. Projected net annual cash flows over the project%u2019s life are:

Year          Net Annual Cash Flow

           1                      $ 3,000

           2                          8,000

           3                        15,000

           4                          9,000

The cash payback period is

b.   2.80 years.

       2. Bradshaw Inc. is contemplating a capital investment of $85,000. The cash flows over the project%u2019s four years are:

                                           Expected Annual           Expected Annual

                    Year                   Cash Inflows                 Cash Outflows

                       1                         $30,000                         $12,000

                       2                           45,000                           20,000

                       3                           60,000                           25,000

                       4                           50,000                           30,000

The cash payback period is

b.   3.35 years.

   3. Jordan Company is considering the purchase of a machine with the following data:

Initial cost                                            $130,000

One-time training cost                            12,000

Annual maintenance costs                     15,000

Annual cost savings                                75,000

Salvage value                                         20,000

The cash payback period is

a.   2.37 years.

4. A company is considering purchasing a machine that costs $320,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used.

The cash payback period on the machine is

c.   5.2 years.

Explanation / Answer

Hi,

Please find the answers as follows:

1)

Total Investment to be Recovered = 23000

Year 1 Cash Flows = 3000

Year 2 Cash Flows = 8000

Balance amount = 23000 - 3000 - 8000 = 12000 will be recovered between year 2 and 3.

Payback Period = 2 + 12000/15000 = 2.8 years

2)

Year 1 Cash Flows = 18000

Year 2 Cash Flows = 25000

Year 3 Cash Flows = 35000

Balance amount = 85000 - 18000 - 25000 - 35000 = 7000 will be recovered between year 3 and 4

Payback Period = 3 + 7000/20000 = 3.35 years

3)

Annual Cash Inflows = 75000 - 15000 = 60000

Payback Period = (130000 +12000)/60000 = 2.37 Years

4)

Annual Cash Inflows = 100000 - 38000 = 62000

Payback Period = 320000/62000 = 5.16 or 5.2 Years

Thanks.

Annual Cash Inflows Annual Cash Outflows Net Annual Cash Inflows Year 1 30000 12000 18000 Year 2 45000 20000 25000 Year 3 60000 25000 35000 Year 4 50000 30000 20000

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