Question

A public works department in a metropolitan area is looking into buying a major equipment to enhance productivity. The initial cost is estimated to be $600,000. It is projected that new equipment will help save $250,000 the first year and decrease gradually by $50,000 for the next four years. Determine the payback period for this equipment purchase.

Answer 1

Public Works Department

The payback period for this equipment purchase is:

= 3 years.

Step-by-step explanation:

a) Data and Calculations:

Initial cost of new equipment = $600,000

Savings from the equipment:

Year 1 = $250,000

Year 2 = $200,000 ($250,000 - $50,000)

Year 3 = $150,000 ($200,000 - $50,000)

Year 4 = $100,000 ($150,000 - $50,000)

Year 5 = $50,000

Payback period:

Year 1 = $250,000

Year 2 = $450,000 ($250,000 + $200,000)

Year 3 = $600,000 ($450,000 + $150,000)