A wund léader of the accountancy and finance profession 18 of 28 hone Cradle Ltd

Question

A wund léader of the accountancy and finance profession 18 of 28 hone Cradle Ltd is considenng purchasing an asset which will cost $180,000 and is expected to last ton yoars with no esale vaue The tatie below gives each year's expocted prect aer degrecaton Year t ? S50 000 Year 2 Year 3 ear 4 Year 5 Year S25,000 $35,000 $22 500 $10,000 $10.000 Year 7 $10,000 Year 8 Year 9 Year 10$10,000 10,000 $10 000 Assume that the cash Bows occur at the end of the year the end of which year does the payback period oocur? ?Year 2 O Year 3 O Year 4 Year 5 Previous Question Noxd

Explanation / Answer

Solution:

Asset Cost = $180,000

Annual Depreciation = Cost - salvage / useful life = 180000 - 0 / 10 = $18,000

From above table, initial cost will be recovered at the end of Year 4. Hence, payback period occur at the end of year 4.

Hence, 3rd option is Correct i.e. Year 4.

Year Profit after Depreciation Depreciation Cash Inflows Cumulative Cash Inflows 1 $50,000.00 $18,000.00 $68,000.00 $68,000.00 2 $25,000.00 $18,000.00 $43,000.00 $1,11,000.00 3 $35,000.00 $18,000.00 $53,000.00 $1,64,000.00 4 $22,500.00 $18,000.00 $40,500.00 $2,04,500.00 5 $10,000.00 $18,000.00 $28,000.00 $2,32,500.00 6 $10,000.00 $18,000.00 $28,000.00 $2,60,500.00 7 $10,000.00 $18,000.00 $28,000.00 $2,88,500.00 8 $10,000.00 $18,000.00 $28,000.00 $3,16,500.00 9 $10,000.00 $18,000.00 $28,000.00 $3,44,500.00 10 $10,000.00 $18,000.00 $28,000.00 $3,72,500.00

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