Question

Wright Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $1,000,000 and a 5-year life. There is no salvage value for the equipment. The increase in cash flow each year of the equipment's life would be as follows:

Year 1	$	375,000
Year 2	$	350,000
Year 3	$	285,000
Year 4	$	230,000
Year 5	$	185,000

What is the payback period?

3.00 years

2.96 years

2.39 years

3.51 years

Answer 1

Cumulative cash flow

	Cash flow	Cumulative Cash flow
Year 1	375000	375000
Year 2	350000	725000
Year 3	285000	1010000
Year 4	230000	1240000
Year 5	185000	1425000

Payback period = 2 years+275000/285000 = 2.96 years

So answer is b) 2.96 years