Olsen Inc. purchased a $640,000 machine to manufacture a specialty tap for elect

Question

Olsen Inc. purchased a $640,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the next 10 years. The government exempts taxes on profits from new investments in order to encourage capital investments. This legislation most likely will remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life with no salvage value. The firm uses straight-line depreciation. The net cash inflow is expected to be $150,600 each year. Olsen uses a discount rate of 10.00% in evaluating its capital investments. Assume that cash inflows occur evenly throughout the year The estimated payback period for this proposed investment, in years, is (rounded to two decimal places):   4.38 4.29 4.25 4.63 4.04

Explanation / Answer

estimated payback period = 4.25

Net cash inflow is expected to be $150,600 each year and occur evenly throughout the year:-

Payback period = Initial investment / Annual cash inflows

=   $640,000 / $150,600

= 4.25 years

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.