Question

3. Determine the payback period at an interest rate or 8% per year for an asset that initially cost $28,000, has a scrap value of $1500 whenever it is sold, and generates cash flow of $2900 per year. If the asset will be in service for 12 years should it be purchased?

Answer 1

Payback period is computed by using the below formula:

= Initial cost / Annual cash flows:

= $ 28,000 / $ 2,900

= 9.66 years Approximately

The NPV of the asset is computed as follows:

= - $ 28,000 + $ 2,900 / 1.08¹ + $ 2,900 / 1.08² + $ 2,900 / 1.08³ + $ 2,900 / 1.08⁴ + $ 2,900 / 1.08⁵ + $ 2,900 / 1.08⁶ + $ 2,900 / 1.08⁷ + $ 2,900 / 1.08⁸ + $ 2,900 / 1.08⁹ + $ 2,900 / 1.08¹⁰ + $ 2,900 / 1.08¹¹ + $ 2,900 / 1.08¹² + $ 1,500 / 1.08¹²

= - $ 5,549.70 Approximately

Since the NPV of the asset is negative, hence the same shall not be purchased

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