Question 11 Vandezande Inc. is considering the acquisition of a new machine that

Question

Question 11 Vandezande Inc. is considering the acquisition of a new machine that costs $370,000 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 (Ignore income taxes.):

Incremental Net Operating Income Incremental Net Cash Flows

Year 1 $ 54,000 $ 128,000   

Year 2 $31,000 $105,000

Year 3 $ 52,000 $126,000

Year 4 $49,000 $123,000

year 5 $48,000 $122,000

Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period of this investment is closest to:

2.9 years

4.9 years

3.1 years

5.0 years

Explanation / Answer

Incremental Net Cash Flows Accumulated cash flows Now -370000 -370000 1 128000 -242000 2 105000 -137000 3 126000 -11000 4 123000 112000 Payback period = 3+(11000/123000)= 3.1 years

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