Question

alpha Company is planning to purchase a new machine for $30,000. The payback period is expected to be five years. The new machine is expected to produce cash flow from operations, net of income taxes, of $7,000 a year in each or the next three years, and $5,500 in the fourth year. What is the amount of cash flow from operations, net of taxes, that the new machine is expected to produce in the last (fifth) year of the payback period?

Answer 1

The payback period shows that cash outflow for the machine will recover in the given time period.

As payback period in the given question is 5 years, it means the total cash flow of five years will be equal to cash outflow of $30,000.

Cash Outflow = Cash Inflows for five years

$30,000 = Ist year+2nd year+3rd year+4th year+5th year

$30,000 = $7,000+$7,000+$7,000+$5,500+5th year

$30,000 = $26,500+5th year cash inflow

5th year cash inflow = $30,000 - $26,500

5th year cash inflow = $3,500

Therefore the cash flow from operations, net of taxes that the new machine is expected to produce in the last (fifth year of the payback period is $3,500.