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Rihanna Company is considering purchasing new equipment for $468,600. It is expected that the equipment will produce net annual cash flows of $66,000 over its 10-year useful life. Annual depreciation will be $46,860. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period years

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Answer:

Payback =7.1 years

Explanation:

If a project has equal annual cash-flows, the payback period can be  calculated using the formula:

[tex]Payback=\frac{CostOfMachine}{AnnualCashflows}[/tex]

In calculating the annual cash-flows, depreciation is not included as it is a non-cash item. As such, the $46,860 annual depreciation figure should not affect the payback period calculation, but instead, the $66,000 annual cash-flows will be used.

As such:

[tex]Payback=\frac{468600}{66000}=7.1 years[/tex]

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