Question

A machine costs $5240 and produces benefits of $1000 at the end of each year for 8 years. Assume an annual interest rate of 10%. What is the payback period (in years)

Answer 1

5.24 years

Step-by-step explanation:

the payback period = $5,240 / $1,000 = 5.24 years

The payback period is the amount of time it takes a project to generate enough cash to cover the initial investment required to carry it out.

You can also calculate the discounted payback period which first calculates the present value of each cash flow:

• PV of cash flow 1 = $909.09
• PV of cash flow 2 = $826.45
• PV of cash flow 3 = $751.31
• PV of cash flow 4 = $683.01
• PV of cash flow 5 = $620.92
• PV of cash flow 6 = $564.47
• PV of cash flow 7 = $513.16
• PV of cash flow 8 = $466.51

in this case, the discounted payback period = 7.8 years