Rihanna Company is considering purchasing new equipment for

Rihanna Company is considering purchasing new equipment for $360,000. It is expected that the equipment will produce net annual cash flows of $50,000 over its 10-year useful life. Annual depreciation will be $36,000. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period years

Solution

Net Annual cash flows = 50000 Initial Investment 360000 Cash Pay-back Period = Initial Investment/Net Annual Cash Flows 360000/50000 7.2 Years Annual depreciation of $36,000 is a non-cash item & only its tax-effects (if Tax-rate is known) will be added to the cash inflows- Hence not considered here.