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18 July, 03:56

The cost of a new machine is $250,000. The machine has a five-year life and no salvage value.

If the cash flow each year is equal to 25% of the cost of the machine, calculate the payback period for the project:

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  1. 18 July, 05:46
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    Initial outlay = $250,000

    Annual cash inflow = 25% x $250,000 = $62,500 per annum

    Payback period = Initial outlay

    Annual cash inflow

    = $250,000

    $62,500

    = 4 years

    Explanation:

    In this respect, there is need to calculate the annual cash inflow, which is 25% of initial outlay. Then, we will divide the initial outlay by the annual cashflow. This gives the payback period of the machine.
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