Willis Inc. has a cost of capital of 15% and is considering the acquisition of a new machine which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow will increase as follows.
What is the payback period of this investment?
| | | 1.5 years. |
| | | 4 years. |
| | | 3 years. |
| | | 3.33 years. |
A project's payback is the length of time it takes for the cash flows generated by the initial investment to equal the initial investment. Assuming the cash flows occur uniformly throughout the year, this project's payback is 3 years.
The project produces cash flows of $160,000 + $140,000 + $100,000 = $400,000 after three years.
Since the initial investment was $400,000, the payback is then exactly 3 years.
Can any one explain ----- While Calculating Cash flow from project - Why afer effect of Tax - Deprication not considered ..
------- isnt it Net Cash Inflow to be considered for Payback ?? Or only Net After CAsh Flow
Please reply
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Brijesh Salian
Manager
Reema Building Material LLC
Jibroo
Oman
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