Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $120,000, and annual operating income of $83,721. The estimated cash payback period for the machine is

Payback period = 3.5 years

Explanation:

The payback period is the estimated length of time it takes cash inflow from a project to recoup the cash outflow.

The payback period uses cash flows and not profit.

Payback period = Initial cost/annual net cash inflow

Payback period = 420,000/120,000 = 3.5 years

Payback period = 3.5 years