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

Question

(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $423,000 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:

Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period of this investment is closest to:

5.0 years

2.7 years

4.3 years

2.1 years

(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $423,000 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:

Explanation / Answer

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

=2+(124000/178000)

=2.7 years(Approx).

Year Cash flows Cumulative Cash flows 0 (423000) (423000) 1 149000 (274000) 2 150000 (124000) 3 178000 54000 4 146000 200,000 5 148000 348000

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