The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability:

Year Income from Operations Net Cash Flow
1 $100,000 $180,000
2 40,000 120,000
3 40,000 100,000
4 10,000 90,000
5 10,000 120,000

The cash payback period for this investment is

a. 5 years
b. 4 years
c. 2 years
d. 3 years

The correct answer is Option B.

Explanation:

According to the scenario, computation of the given data are a follows:

Investment = $490,000

So, we can calculate the cumulative cash flow by using following method:

Year              Net cash flow              Cumulative cash flow

1                      $180,000                         $180,000

2                      $120,000                         $300,000

3                      $100,000                         $400,000

4                      $90,000                           $490,000

5                      $120,000                         $610,000

Since, after 4 years the investment and net cash flow both are $490,000

Therefore, Payback period = 4 years