Question

Nelson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $107,000. The equipment will have an initial cost of $214,000 and have a 3 year life. If the salvage value of the equipment is estimated to be $82,000, what is the payback period? Ignore income taxes.

Answer 1

2 years

Step-by-step explanation:

The computation of the payback period is shown below:

Payback period = Initial cost of equipment ÷ Annual increase in cash flow

= $214,000 ÷ $107,000

= 2 years

By dividing the initial cost of equipment from the annual increase in cash flow we can get the payback period and the same is shown above i,e in the computation part. and we ignored the salvage value for the same