The new Big Electical Warehouse, Inc., is thinking of buy a new machine on January 1, 2016 for $100,000 and have an estimated salvage value at the end of its estimated 5-year estimated life of $15,000
|
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
Net income
|
$ 7,000
|
$8,000
|
$9,000
|
$9,500
|
$9,500
|
|
Operating cash flows
|
20,000
|
21,000
|
21,000
|
19,000
|
19,500
|
The company's required rate of return is 6% and its cost of capital is 5%. The income tax rate is 30%.
Determine the payback period of the proposed acquisition and interpret your answer.
What are the problems with payback period?