The management of Retz Corporation is considering the purchase of a new machine

Question

The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company's desired rate of return is 10% The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Income from Year Net Cash Flow Operations $100,000 80,000 50,000 10,000 10,000 $200,000 170,000 130,000 80,000 80,000 The cash payback period for this investment is: Oa. 5 years b. 2 years Oc. 3 years d. 4 years.

Explanation / Answer

Hence Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3 years.

Year Cash flows Cumulative Cash flows 0 (500,000) (500,000) 1 200,000 (300,000) 2 170000 (130000) 3 130000 0 4 80000 80000 5 80000 160,000

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