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Cullumber Company is considering purchasing new equipment for $600,300. It is expected that the equipment will produce net annual cash flows of $69,000 over its 10-year useful life. Annual depreciation will be $60,030. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period enter the cash payback period in years rounded to 1 decimal place years

Respuesta :

The cash payback period is 8.7 years.

Given,

Cullumber Company is thinking about spending $60,300 on new equipment.

Over the course of its 10-year useful life, new equipment will provide net yearly cash flows of $69,000.

Depreciation will cost $60,030 per year.

The payback period is the length of time needed for a project's cash inflows to exceed its initial cash outflow.

A project that delivers a quick return is less dangerous than one that generates the same return over a longer period of time, hence this formula is helpful for risk reduction analysis.

Using the payback period formula we get,

Cash payback period = Cost of new equipment / Annual cash flows

Since, depreciation is not a cash outflow or inflow it will not be considered.

Therefore, Cash payback period = $600,300 / $69,000

                                                      = 8.7 years

Hence, the cash payback period is 8.7 years.

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