If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is:

It will take 7.5 years to cover the initial investment. If the company take into account the tax shield of the depreciation expense, the payback period will be lower.

Explanation:

Giving the following information:

Initial investment= $16,000

Useful life= 8 years

Salvage value= $2,000

Cash inflows= $2,000

The payback period is the time required to cover the initial investment.

Year 1= 2,000 - 16,000= -14,000

Year 2= 2,000 - 14,000= -12,000

Year 3= 2,000 - 12,000= -10,000

Year 4= 2,000 - 10,000= -8,000

Year 5= 2,000 - 8,000= -6,000

Year 6= 2,000 - 8,000= -4,000

Year 7= 2,000 - 4,000= -2,000

Year 8= 4,000 - 2,000= 2,000 (Assuming the asset is sold for its salvage value)

To be more accurate:

(2,000/4,000)= 0.5

It will take 7.5 years to cover the initial investment. If the company take into account the tax shield of the depreciation expense, the payback period will be lower.

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