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A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
-The cash payback period on the equipment is
A) 13.3 years.
B) 8.0 years.
C) 5.0 years.
D) 2.5 years.

Question

Use the following information for questions 
A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
-The cash payback period on the equipment is
A) 13.3 years.
B) 8.0 years.
C) 5.0 years.
D) 2.5 years.

Quizplus · Accepted Answer

The cash payback period is the length of time it takes for the cash inflows from a project to equal the initial cash outflow. To calculate the cash payback period, we need to determine how long it will take for the annual net cash inflows ($135,000 - $39,000 = $96,000) to total $480,000.

Cash payback period = Initial investment ÷ Annual net cash inflows
Cash payback period = $480,000 ÷ $96,000 = 5 years

Therefore, the best choice is C, as it has the shortest cash payback period compared to the other options.

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