Question

Vandezande Inc. is considering the acquisition of a new machine that costs $367,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):
	Incremental Net Operating Income		Incremental Net Cash Flows
Year 1	74,000		154,000
Year 2	80,000		159,000
Year 3	91,000		175,000
Year 4	54,000		156,000
Year 5	96,000		158,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The payback period of this investment is closest to: (Round your answer to 1 decimal place.)
Multiple Choice
3.5 years
5.0 years
4.7 years
2.3 years

Answer 1

Year	Cash Flow	Cumulative Cashflow (currecnt cash flow + all previous cashflows)
1	154000	154000
2	159000	313000
3	175000	488000
4	156000	644000
5	158000	802000
		As Initial Outlay is 367000, it will be recoverd in between year 2 & 3. Therefore, Payback Period will be between 2nd and 3rd year.
		Payback Period will be 2 years + proportionate of 3rd year Payback Pariod = 2+[(367000-313000)/(488000-313000)]
		Payback Period = 2.3086 years

Therefore, Payback Period = 2.3 years