Question

Vandezande Inc. is considering the acquisition of a new machine that costs $473,000 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 $ 81,000 $ 155,000 Year 2 $ 87,000 $ 166,000 Year 3 $ 98,000 $ 175,000 Year 4 $ 61,000 $ 163,000 Year 5 $ 103,000 $ 165,000 Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period of this investment is closest to:

Answer 1

Calculate cumulative cash flow

	Cash flow	Cumulative cash flow
1	155000	155000
2	166000	321000
3	175000	496000
4	163000	659000
5	165000	824000

Payback period = 2 Years+152000/175000 = 2.87 Years