39 (Ignore income taxes in this problem.) Baldock Inc. is considering the acquis

Question

39 (Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $464,000 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 Year 1 Year Year 3 Year 4 Year 5 Incremental Net Operating Income $72,000 $78,000 $89,000 Incremental Net Cash Flows $153,000 $157000 $178,000 $154,000 $156,000 $94,000 Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period of this investment is closest to 2.1 years 5.0 years 1 years 2.9 years

Explanation / Answer

Year Cash flows Cumulative Cash flows 0 -464000 -464000 1 153000 -311000 2 157000 -154000 3 178000 24000 Payback period = 2+(154000/178000)= 2.9 years

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