The Seago Company is planning to purchase $500,000 of equipment with an estimated seven-year life and no

Question:

The Seago Company is planning to purchase $500,000 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment.

Year Projected Cash Flows

1 ....$200,000

2 .... 150,000

3 .... 100,000

4 .... 60,000

5 .... 60,000

6 .... 40,000

7 .... 40,000

Required

a. Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year.

b. If Seago requires a payback period of three years or less, should the company make this investment?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... 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,...