Asked by Casey Hamilton on Apr 26, 2024
Verified
For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life is expected to generate operating income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years.
Net Cash Inflows
The total amount of cash received minus the total amount of cash outflows over a specified period.
Operating Income
Operating income is the profit earned from a firm's normal business operations, excluding non-operating income and expenses like interest and taxes.
Cash Payback Period
The duration it takes for an investment to generate cash flows sufficient to recover the initial investment cost, often used in capital budgeting to assess investment attractiveness.
- Absorb the essence of the cash payback period and the procedures for its calculation.
Verified Answer
MR
Madeline RichardsApr 30, 2024
Final Answer :
False
Explanation :
The cash payback period is calculated by summing the net cash inflows until the initial investment is recovered. In this case, by the end of Year 4 ($90,000 + $85,000 + $75,000 + $75,000 = $325,000), the initial investment of $500,000 has not been fully recovered. By adding the Year 5 inflow ($75,000), the total inflow reaches $400,000, which still does not recover the initial $500,000 investment, indicating the payback period is longer than 5 years.
Learning Objectives
- Absorb the essence of the cash payback period and the procedures for its calculation.