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Rihanna Company is considering purchasing new equipment for $450,000. It is expected that the equipment will...

Rihanna Company is considering purchasing new equipment for $450,000. It is expected that the equipment will produce net annual cash flows of $60,000 over its 10-year useful life. Annual depreciation will be $45,000. Compute the cash payback period.

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Answer #1

Payback period is the time period in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment.

It is computed using the following formulae:

Payback period=Initial investment/Cash inflow per period

=$450,000/$60,000

=7.5 years

Thus, the cash payback period is 7.5 years.

Note:

It is assumed that the net annual cash flows are after considering the annual depreciation.

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