The cost of a new machine is $250,000. The machine has a five-year life and no salvage value.

If the cash flow each year is equal to 25% of the cost of the machine, calculate the payback period for the project:

Initial outlay = $250,000

Annual cash inflow = 25% x $250,000 = $62,500 per annum

Payback period = Initial outlay

Annual cash inflow

= $250,000

$62,500

= 4 years

Explanation:

In this respect, there is need to calculate the annual cash inflow, which is 25% of initial outlay. Then, we will divide the initial outlay by the annual cashflow. This gives the payback period of the machine.