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You are considering buying a new machinery for the factory to help boost the production for a new product line. The machinery has an estimated economic life of 8 years, and requires £ 9,000 in initial co The table below shows the estimated cashflows from the project during its life: Year & }(c) Cashflows (E) 1 & 3,000 2 & 3,000 3 & 2,000 4 & 2,000 5 & 1,000 6 & 800 7 & 600 8 & 400 What is the payback period from the project?

Question

You are considering buying a new machinery for the factory to help boost the production for a new product line. The machinery has an estimated economic life of 8 years, and requires £ 9,000 in initial co
The table below shows the estimated cashflows from the project during its life:

 Year & }(c)
Cashflows 
(E)
 
 1 & 3,000 
 2 & 3,000 
 3 & 2,000 
 4 & 2,000 
 5 & 1,000 
 6 & 800 
 7 & 600 
 8 & 400 


What is the payback period from the project?

You are considering buying a new machinery for the factory to help boost the production for a new product line. The machinery has an estimated economic life of 8 years, and requires £ 9,000 in initial co The table below shows the estimated cashflows from the project during its life: Year & }(c) Cashflows (E) 1 & 3,000 2 & 3,000 3 & 2,000 4 & 2,000 5 & 1,000 6 & 800 7 & 600 8 & 400 What is the payback period from the project?

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BillyElite · Tutor for 8 years

Answer

The payback period of the machinery is predicted to be 4 years.

Explain

The payback period refers to the amount of time it takes for an investment to generate a flow of cash equal to the initial cost of the investment. For this case, the investment being a relatively expensive new machinery. This time, you're looking to earn back your initial investment of \( £ 9,000 \) using the annual net cash inflows the machinery can generate.<br /><br />Let us then calculate the cumulative annual net cash inflows and watch when it becomes equal or goes beyond the cost of the newly considered machinery (\( £ 9,000 \)):<br /><br />Year 1: £3,000<br />Year 2: £3,000 + £3,000 = £6,000<br />Year 3: £6,000 + £2,000 = £8,000<br />Year 4: £8,000 + £2,000 = £10,000<br /><br />On Year 4, the accumulative cash inflow (£10,000) has now surpassed our initial investment of \( £ 9,000 \).
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