Question

1. Major Corporation is considering the purchase of a new machine for $5,000. The machine has an estimated useful life of 5 years and no salvage value. The machine will increase Major's cash flows by $2,000 annually for 5 years. The company's required rate of return is 10%. What is the payback period for the machine? A) 5.00 years B) 2.50 years C) 7.58 years D) 8.34 years 2. Overland Company has gathered the following data on a proposed investment project: Investment in equipment........................... Annual cash flows.................... ... ... Salvage value of equipment................ Life of the equipment........................... Required rate of return................. $150,000 $40,000 SO 10 years 10% 3. The payback period for the investment is: A) 0.27 years B) 3.75 years C) 10.00 years D) 2.13 years

Answer 1

1. Ans - 2.5 years

Explanation:

The payback method is the original investment divided by cash flow after taxes, or $5,000 divided by $2,000 for a payback of 2.5 years. Payback does not utilize discounted cash flows, so the information regarding the time value of money is not needed to solve the problem.

2 & 3.

Ans - B) 3.75

Explanation:

Initial investment Cumulative cashflow for 3 years Payback period 3 years + Annual cash inflow for 4h year $ 150,000 (3 years x $ 40,000) = 3 years S 40,000 $150,000 S 120,000 + years $ 40,000 $30,000 = 3 years + $40,000 = 3 years + 0.75 years 3.75 years