Asked by Arvind Sethi on Apr 25, 2024
Verified
Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?
A) 3.5 years
B) 4 years
C) 4.5 years
D) 5 years
Cash Payback Period
The time it takes for an investment to generate an amount of cash equal to the initial investment cost.
Negligible Residual Value
A term used to describe an asset's end-of-life value that is considered to be insignificantly small or practically zero.
- Compute and understand the significance of the cash payback period in investment decisions.
Verified Answer
TC
Tanner CereghinoApr 26, 2024
Final Answer :
C
Explanation :
To calculate the cash payback period, we need to divide the initial cost of the machine by the net annual cash flows, which gives us:
Cash payback period = Initial cost / Annual net cash flow
Cash payback period = $675,000 / $150,000
Cash payback period = 4.5 years
Therefore, the estimated cash payback period for the machine is 4.5 years, which is option C.
Cash payback period = Initial cost / Annual net cash flow
Cash payback period = $675,000 / $150,000
Cash payback period = 4.5 years
Therefore, the estimated cash payback period for the machine is 4.5 years, which is option C.
Learning Objectives
- Compute and understand the significance of the cash payback period in investment decisions.