Question

Marigold Unlimited is considering purchasing an additional delivery truck that will have a seven-year useful life. The new truck will cost $36,000. Cost savings with this truck are expected to be $11,200 for the first two years, $7,700 for the following two years, and $4,300 for the last three years of the truck's useful life.

What is the payback period for this project? (Round answer to 2 decimal places, e.g. 52.75.) Payback period years
What is the discounted payback period for this project with a discount rate of 10 percent? (Round intermediate calculations to 5 decimal places, e.g. 0.42355. Round answer to 2 decimal places, e.g. 52.75.)

Answer 1

The payback period for Marigold Unlimited's new truck is the time it takes for the cumulative cost savings to equal the original investment of $36,000. The discounted payback period accounts for the time value of money by using a 10 percent discount rate to find when the present value of the savings equals the initial cost.

Step-by-step explanation:

To determine the payback period for Marigold Unlimited's additional delivery truck, we will calculate how long it will take for the cost savings to equal the investment cost of $36,000. The savings are $11,200 per year for the first two years, $7,700 per year for the following two years, and $4,300 per year for the last three years. To find the payback period, we add up the savings each year until the total reaches the initial cost of the truck.

• Year 1-2: $11,200 savings per year
• Year 3-4: $7,700 savings per year
• Year 5-7: $4,300 savings per year

For the discounted payback period, we need to use the present value of these savings with a 10 percent discount rate. We discount each year's savings back to their present value and accumulate these until they equate to the initial investment, which will give us the discounted payback period.