A business is considering investing in new machinery. The machinery will cost £850 000. The cash flows are shown below and are assumed to accrue evenly during the year.
Select ONE answer:
- 1 year 89 days
- 1 year 324 days
- 2 year 33 days
- 2 years 122 days
- 3 years 54 days
Show your workings to arrive at your answer, and explain and justify your reasons:
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This is multiple choice question is suitable for Accounting KS5 classes.
The answer is 4 – Y0 cash outflow is £850k to buy the machine. After Y1, there was a net cash inflow of £250k (£450k – £200k) leaving a balance of the initial investment of negative £600k. After Y2, there was a net cash inflow of £450k (£650k -£200k) leaving a balance of the initial investment of negative £150k. Therefore in Y3 there is £150k to recoup on a linear basis and if the net cash inflow remains £450k (£650k -£200k) means that you will have repaid the investment at 2 years + (£150k / £450k) * 365 days which is 122 days rounded up.
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