Question

A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 and that's expected to reduce operating costs by $18,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine is closest to _______ years.

A. 33.3
B. 4
C. 8.3
D. 0.25

Answer 1

B. 4 years

Explanation:

Data provided as per the requirement of the payback period is here below:-

Investment = $72,000

Cash inflow each year = $18,000

The computation of the payback period for this machine in years is shown below:-

Payback period =
`(Investment)/(Cash\ inflow\ each\ year)`

=
`(\$ 72,000)/(\$ 18,000)`

= 4 years

Therefore for computing the payback period we simply applied the above formula.