Question

A company is considering the purchase of new equipment for $480,000. The projected after-tax net income is $80,000 per year after deducting $160,000 of annual depreciation expense. The equipment has a useful life of 3 years and no salvage value. What is the payback period for the new equipment?

a. 2 years.
b. 3 years.
c. 4 years.
d. 5 years.
e. 6 years.

Answer 1

a. 2 years.

Step-by-step explanation:

Annual cash flow = After-tax net income + Depreciation

Annual cash flow = $80,000 + $160,000

Annual cash flow = $240,000

Payback Period = Cost of Project / Annual cash Flow

Payback Period = $480,000 / $240,000

Payback Period = 2 years

So, the payback period for the new equipment is 2 years.