question archive A company is considering of purchasing a new machine
A company is considering of purchasing a new machine
Subject:FinancePrice:2.86 Bought15
A company is considering of purchasing a new machine. The estimated cost of the machine is Php 300,000. The machine is not expected to have a residual value at the end of four years. The machine is expected to generate annual cash inflows for the next four years as follows:
Year 1 ----- Php 150,000.00
Year 2 ----- Php 120,000.00
Year 3 ----- Php 90,000.00
Year 4 ----- Php 50,000.00
This company has a policy of accepting project only if it has a payback period of not longer than 3 years. What is the expected payback period for this project?
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3 points for solution
2 points for correct choice
Select one:
a. 3.6
b. 3
c. 2.33
d. 2.93
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| Year | Cash flows | Cumulative Cash flows |
| 0 | (300,000) | (300,000) |
| 1 | 150,000 | (150,000) |
| 2 | 120,000 | (30,000) |
| 3 | 90,000 | 60,000 |
| 4 | 50,000 | 110,000 |
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=2+(30,000/90,000)
=2.33(Approx)
