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Pharoah Company has identified that the cost of a new computer will be $40000, but with the use of the new computer, net income will increase by $3000 a year. If depreciation expense is $1000 a year, the cash payback period is: 13.3 years. 20.0 years. 40.0 years. 10.0 years.

Respuesta :

The correct option is payback Period [tex]10.0[/tex] Years.

Payback Period:

The time it takes to recoup the cost of an investment is referred to as the payback period. It is simply the amount of time it takes an investment to break even. The payback period is crucial since people and businesses invest money primarily to be reimbursed.

The temporal worth of money is disregarded. All other capital budgeting strategies take into account the idea of the time value of money. According to the principle of time value of money, a rupee now is worth more than a rupee tomorrow. In order to arrive at discounted flows, different strategies discount future inflows.

You can use the mathematical formula to determine the payback period: Payback Period = Initial investment / Cash flow per year.

Annual Cash flows = Depreciation + Net income

[tex]= 3000+1000 \\=4000[/tex]

Payback Period = Investment / Annual Cash flows

[tex]= 40,000/4,000[/tex]

[tex]= 10.0[/tex] years.

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