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    Payback Period Sample

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    MARIA THERESA ABRIO
    The Rani Beverage Company is considering purchasing new equipment to increase production and revenues. The equipment would cost $37,500 with annual cash inflows of $75,000 and outflows of $60,000. The payback period is calculated to be 2.5 years, which is less than the company's maximum of 4 years. Therefore, according to the payback method, the company should purchase the new equipment.

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    Payback Period Sample

    Uploaded by

    MARIA THERESA ABRIO
    220 views2 pages
    The Rani Beverage Company is considering purchasing new equipment to increase production and revenues. The equipment would cost $37,500 with annual cash inflows of $75,000 and outflows of $60,000. The payback period is calculated to be 2.5 years, which is less than the company's maximum of 4 years. Therefore, according to the payback method, the company should purchase the new equipment.

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    The Rani Beverage Company is considering purchasing new equipment to increase production and revenues. The equipment would cost $37,500 with annual cash inflows of $75,000 and outflows of $60,000. The payback period is calculated to be 2.5 years, which is less than the company's maximum of 4 years. Therefore, according to the payback method, the company should purchase the new equipment.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    220 views2 pages

    Payback Period Sample

    Uploaded by

    MARIA THERESA ABRIO
    The Rani Beverage Company is considering purchasing new equipment to increase production and revenues. The equipment would cost $37,500 with annual cash inflows of $75,000 and outflows of $60,000. The payback period is calculated to be 2.5 years, which is less than the company's maximum of 4 years. Therefore, according to the payback method, the company should purchase the new equipment.

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    Due to increased demand, the management of Rani Beverage Company is

    considering to purchase a new equipment to increase the production and revenues.


    The useful life of the equipment is 10 years and the company’s maximum desired
    payback period is 4 years.  The inflow and outflow of cash associated with the new
    equipment is given below:

    Initial cost of equipment: $37,500

    Annual cash inflows:

    Sales $75,000

    Annual cash outflows:

    Cost of ingredients: $45,000

    Salaries expenses: $13,500

    Maintenance expenses: $1,500

    Non-cash expenses:

    Depreciation expenses $5,000

    Required: Should Rani Beverage Company purchase the new equipment? Use


    payback method for your answer.
    Solution:

    Step 1: In order to compute the payback period of the equipment, we need to workout the
    net annual cash inflow by deducting the total of cash outflow from the total of cash inflow
    associated with the equipment.

    Computation of net annual cash inflow:

    $75,000 – ($45,000 + $13,500 + $1,500)


    = $15,000

    Step 2: Now, the amount of investment required to purchase the equipment would be
    divided by the amount of net annual cash inflow (computed in step 1) to find the payback
    period of the equipment.

    = $37,500/$15,000

    =2.5 years

    Depreciation is a non-cash expense and has therefore been ignored while calculating
    the payback period of the project.

    According to payback method, the equipment should be purchased because the payback
    period of the equipment is 2.5 years which is shorter than the maximum desired payback
    period of 4 years.

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