Question

A company with $900,000 in operating assets is considering the purchase of a machine that costs $92,000 and which is expected to reduce operating costs by $24,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.):

Answer 1

Answer: 3.83years

Explanation:Payback period is the time in which the initial outlay of an investment is expected to be recovered through the cash inflows generated by the investment.

Most times cash flow estimates areaccurate for periods in the short term-near future and inaccurate for periods in distant future-,long term due to uncertainties which may be operational or economical.

payback involves risk in a project because it takes initial inflows into account and disregard the cash flows after the initial investment is recovered.

Projects with having larger cash returns inflows in the shorter periods are generally ranked higher when compared to similar projects having larger cash inflows in the longer periods.

Payback period is given by

Amount invested/ net cash inflows

Therefore we have that 92,000/24000 =3.83 years

Answer 2

3.83 years

Step-by-step explanation:

The payback period measures how long it takes for the amount invested in a project to be recovered from the cumulative cash flows.

It is a capital budgeting technique that doesn't account for the time value of money.

Payback period = Cost of asset / cash flows

$92,000/ $24,000 = 3.83 years

I hope my answer helps you