Major corp. Is considering the purchase of a new machine for $5,000 that will have an estimated useful life of 5 years and no salvage value. The machine will increase major's after-tax cash flow by $2,000 annually for 5 years. Major uses the straight-line method of depreciation and has an incremental borrowing rate of 10%. The present value factors for 10% are as follows:
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Major Corp. is considering the purchase of a new machine for $5,000 that will have an estimated useful life of five years and no salvage value. The machine will increase Major's after-tax cash flow by $2,000 annually for five years. Major uses the straight-line method of depreciation and has an incremental borrowing rate of 10%. The present value factors for 10% are as follows:
Ordinary annuity with five payments 3.79
Annuity due for five payments 4.17
Using the payback method, how many years will it take to pay back Major's initial investment in the machine?
2.5
The payback period method determines how many years would be required to recover the initial project investment cost. It is calculated as:
Payback = investment cost/annual cash savings.
For the facts given, the calculation would be: Payback period = $5,000/$2,000 = 2.5 years.
Eval Co. is evaluating a major capital project to determine its economic feasibility. The following data have been accumulated:
Initial cost of project $40,000
Estimated annual net cash inflow (revenue) 8,000
Estimated periods benefited 10 years
Estimated project residual value -0-
Cost of capital 12%
Eval Co. uses straight-line depreciation for capital investments of this type.