Question

A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case

Answer 1

The payback period will be of 26 months, that is, 2 years and 2 months.

Step-by-step explanation:

Given that the total cost of motorcycles has been $ 78,000, and that their use will increase monthly profits by $ 3,000 per month, the payback period will be determined from the following calculation:

3,000 x 12 = 36,000 (that is, for a year motorcycles will report an extra $36,000)

So, we must divide the total spent by the extra annual income, to determine the total amount of time in which the investment will recover:

78,000 / 36,000 = 2.16

Since 2.16 is calculated in decimals, and the years have 12 months, we must multiply this result by 12 to determine the number of months in which the investment will recover.

2.16 x 12 = 26

Therefore, the payback period will be of 26 months, that is, 2 years and 2 months.