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£50000 is spent on a machine having 5 years life and 5000 residual value, all cash inflows will be the same each except for year 1, when the figure is £6000, the average return on initial investment has been calculated 12% per annum. What is the payback period?
I calculated it as 3.58 is it correct? If not please explain.Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers!
The total profit over the 5 years is 5 x 12% x 50,000 = 30,000.
The total depreciation over 5 years is 50,000 – 5,000 = 45,000.
Therefore the total cash over 5 years is 30,000 + 45,000 = 75,000.Cash in the first year is 6,000, and therefore in each of the next 4 years it is
(75000 – 6000) / 4 = 17250Therefore the payback period is 1 + ((50,000 – 6,000)/17250) = 3.55 years.
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