6 Delley Inc is considering the acquisition of equipment tha

6. Delley Inc. is considering the acquisition of equipment that costs $340,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are: 9 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Incremental Net Cash Flows $94,000 $133,000 $96,000 $116,000 $115,000 $87,000 The payback period of this investment, rounded off to the nearest tenth of a year, is closest to: A) 3.9 years B) 3.6 years C) 3.1 years D) 5.0 years

Solution

Option C)

Year

Cashflow

Cumulative cashflow

0

-340000

-340000

1

94000

-246000

2

133000

-113000

3

96000

-17000

4

116000

99000

5

115000

214000

6

87000

301000

Formula = A+(B/C)
A = last year with negative cashflow
B = absolute value of cumulative cashflow at period A
C = cash flow during year A
PBP = 3+(17000/96000) = 3.18 years = 3.1 years

Year	Cashflow	Cumulative cashflow
0	-340000	-340000
1	94000	-246000
2	133000	-113000
3	96000	-17000
4	116000	99000
5	115000	214000
6	87000	301000