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Equipment costs $80,000, generates $25,000 of cash revenue a year and needs $5,000 a year of cash maintenance. What is the cash payback period?
A4 years
B3 years
C5 years
D6 years
Answer & Solution
Correct answer: A. 4 years
1. Annual net cash flow is cash revenue minus cash expenditure.
2. $25,000 minus $5,000 gives $20,000 a year.
3. Cash payback divides the cost of the asset by that annual net cash flow.
4. $80,000 divided by $20,000 gives 4 years.
5. If management will accept only a three year payback, this proposal is dropped at once.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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