Question

The Ayayai Company is planning to purchase $524,500 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Projected Cash Flows $201,000 151,000 101,000 78,000 78,000 41,000 41,000 Total $691,000 (a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year.

Answer 1

Payback Period	3.92	years
The company should not make this investment
As the required the actual payback period is more than required payback period of 3 years
Workings:
Year	Investment	Cumulative Cash Flow
0	$      -5,24,500	$        -5,24,500
1	$        2,01,000	$        -3,23,500
2	$        1,51,000	$        -1,72,500
3	$        1,01,000	$           -71,500
4	$            78,000	$               6,500
5	$            78,000	$             84,500
6	$            41,000	$         1,25,500
7	$            41,000	$         1,66,500
Payback Period	=	3 years + ($71500 / $78000)
	=	3.92	years