Answered

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Wright Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $1,000,000 and a 5-year life. There is no salvage value for the equipment. The increase in cash flow each year of the equipment's life would be as follows: Year 1 $ 379,000 Year 2 $ 354,000 Year 3 $ 289,000 Year 4 $ 234,000 Year 5 $ 189,000 What is the payback period

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Answer:

The payback period is 2 years and 337 days to cover the initial investment.

Explanation:

Giving the following information:

Cash flows:

Year 1 $ 379,000

Year 2 $ 354,000

Year 3 $ 289,000

Year 4 $ 234,000

Year 5 $ 189,000

Initial investment= $1,000,000

The payback period is the time required for the cash flows to cover the initial investment:

Year 1= 379,000 - 1,000,000= -621,000

Year 2= 354,000 - 621,000= -267,000

Year 3= 289,000 - 267,000= 22,000

To be more accurate:

(267,000 / 289,000)= 0.923*365= 337

The payback period is 2 years and 337 days to cover the initial investment.

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