Question

Palmer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $105,000. The equipment will have an initial cost of $473,000 and have a 10 year life. If the salvage value of the equipment is estimated to be $84,000, what is the payback period?A. 10.00 yearsB. 5.25 yearsC. 4.50 yearsD. 3.29 years

Answer 1

D. 3.29 years

Step-by-step explanation:

Payback period = Initial cost / (An annual increase in net income after tax + Depreciation per year )

Payback period = $473,000 / [$105,000 + ($473,000-$84,000)/10]

Payback period = $473,000 / [$105,000+$38,900

Payback period = $473,000 / $143,900

Payback period = 3.28700

Payback period = 3.29 years