Asked by Courtney Coffman on May 29, 2024
Verified
A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years.
Payback Period
The amount of time it takes for an investment to generate enough cash flows to recover its initial cost.
Income From Operations
Earnings generated from a company's normal business activities, excluding revenues and expenses from non-operating activities.
Net Cash Flows
The difference between cash inflows and cash outflows in a business over a specific period, indicating the net amount of cash generated or used.
- Acquire knowledge on the payback period concept and its use in the evaluation of capital investments.
Verified Answer
KA
Kaycee AlanisMay 31, 2024
Final Answer :
False
Explanation :
The payback period can be calculated by dividing the initial cost by the net annual cash flows:
Payback period = $21,000 / $3,500 = 6 years
Since the payback period is shorter than the stated 10.5 years, the statement is false.
Payback period = $21,000 / $3,500 = 6 years
Since the payback period is shorter than the stated 10.5 years, the statement is false.
Learning Objectives
- Acquire knowledge on the payback period concept and its use in the evaluation of capital investments.