Payback methods, even and uneven cash flows You have the opportunity to expand your business by purchasing

Question:

Payback methods, even and uneven cash flows You have the opportunity to expand your business by purchasing new equipment for $159,000. The equipment has a useful life of nine years. You expect to incur cash fixed costs of $96,000 per year to use this new equipment, and you expect to incur cash variable costs in the amount of 10% of cash revenues. Your cost of capital is 12%.

Required

1. Calculate the payback period and the discounted payback period for this investment, assuming you will generate $140,000 in cash revenues every year.

2. Assume instead that you expect the following cash revenue stream for this investment:

Year 1 $ 90,000

Year 2 115,000

Year 3 130,000

Year 4 155,000

Year 5 170,000

Year 6 180,000

Year 7 140,000

Year 8 125,000

Year 9 110,000

Based on this estimated revenue stream, what are the payback and discounted payback periods for this investment?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...