Question

Palmer corp is considering the purchase of a new piece of equipment. the cost savings from the equipment would result in an annual increase in net income after tax of "$100,000" . the equipment will have an initial cost of "$400,000" and have a "7" year life. if the salvage value of the equipment is estimated to be "$75,000" , what is the payback period

Answer 1

4 years

Step-by-step explanation:

Payback period is the time in which a project returns back the initial investment in the form of net cash flow.

Initial Investment = $400,000

Annual increase in net Income = $100,000

Payback period = Initial Investment / Annual increase in net income

Payback period = $400,000 / $100,000

Payback period = 4 years

The initial cost of $400,000 will be paid back in only 4 years time by the equipment.