Final answer:
Machine B has the best payback period of 5 years, making it the best option for purchase when evaluating solely on cash payback period.
Step-by-step explanation:
The question at hand is evaluating which of the three machines, A, B, or C, has the best cash payback period. The payback period can be calculated by dividing the initial investment by the annual cash flow.
- Machine A: \(\frac{300,000}{40,000} = 7.5\) years
- Machine B: \(\frac{250,000}{50,000} = 5\) years
- Machine C: \(\frac{500,000}{75,000} = 6.67\) years
Upon analysis, Machine B presents the shortest payback period and therefore, is the investment with the quickest return and represents the best option in terms of cash payback.
Payback period is defined as the number of years required to recover the original cash investment. In other words, it is the period of time at the end of which a machine, facility, or other investment has produced sufficient net revenue to recover its investment costs.
The payback period is calculated by dividing the amount of the investment by the annual cash flow. Account and fund managers use the payback period to determine whether to go through with an investment. One of the downsides of the payback period is that it disregards the time value of money.