ExpertMedium1 markMultiple Choice
CPA · Question 30 · Area I: Business Analysis
A company purchases a machine for $100,000. It estimates the machine will generate annual cash inflows of $30,000 for 5 years. The company requires a 10% return. The annuity factor for 5 years at 10% is 3.791. What is the Payback Period and the Net Present Value (NPV)?
A company purchases a machine for $100,000. It estimates the machine will generate annual cash inflows of $30,000 for 5 years. The company requires a 10% return. The annuity factor for 5 years at 10% is 3.791. What is the Payback Period and the Net Present Value (NPV)?
Answer options:
A.
Payback: 3.33 years; NPV: $13,730
B.
Payback: 3.00 years; NPV: $50,000
C.
Payback: 3.33 years; NPV: $50,000
D.
Payback: 4.00 years; NPV: $13,730
How to approach this question
Payback = Initial Investment / Annual Cash Flow. NPV = (Annual Cash Flow × Annuity Factor) - Initial Investment.
Full Answer
A.Payback: 3.33 years; NPV: $13,730✓ Correct
A
Payback Period = $100,000 / $30,000 = 3.33 years. NPV = ($30,000 × 3.791) - $100,000 = $113,730 - $100,000 = $13,730.
Common mistakes
Confusing discounted payback with regular payback.
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