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Equipment costing $80,000 generates net cash flows of $12,000, $18,000, $24,000, $26,000, $30,000 and $34,000 over six years. What is the cash payback period?
A2 years
B3 years
C4 years
D5 years
Answer & Solution
Correct answer: C. 4 years
1. When cash flows differ each year, they are accumulated until they reach the cost of the asset.
2. After year 1 the running total is $12,000.
3. After year 2 it is $30,000, and after year 3 it is $54,000.
4. After year 4 it is $80,000, which equals the cost of the asset.
5. The cash payback period is therefore 4 full years.
6. Dividing the $80,000 by an average of the six years would blur the timing that this method exists to capture.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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