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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Payson Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $1,200,000 and either has (a) even cash flows of $300,000 per year or (b) the following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000.

Required:

Calculate the payback period for each case.

To determine

Compute payback period for each scenario.

Explanation

Payback Period:

The time taken by an investment to recover its original value is known as payback period. It is calculated by dividing the original amount of investment by annual cash flow from the investment.

(a)

Use the following formula to calculate payback period:

Paybackperiod=OriginalinvestmentAverageannualcashflow

Substitute $1,200,000 for original investment and $300,000 for average annual investment in the above formula

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