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Colby company is considering the purchase of a machine costing $75,000. If Colby buys this machine,...

Colby company is considering the purchase of a machine costing $75,000. If Colby buys this machine, net cash flows will increase by $10,000 per year. Calculate the payback period. If this machine is expected to last for 10 years, should Colby purchase this machine?

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Answer #1
Payback Period 7.5 year

Explanation:

1) Payback Period:

= Net Initial Investment Required ÷ Net Annual Cash Inflow

= $ 75,000 ÷ $ 10,000

= 7.5 Year

2)  If this machine is expected to last for 10 years, should Colby purchase this machine?

Ans: No

1) Payback Period does not consider the useful life of the asset after full payback period.

2) The payback period does not consider the presence of any additional cash flows that may arise from an investment in the periods after full payback has been achieved.

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