A company with $810,000 in operating assets is considering the purchase of a machine that costs $86,000 and which is 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 in years is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)
A) 4.8 years
B) 9.4 years
C) 0.21 years
D) 45 years

Question

Quizplus · Accepted Answer

Payback period = Cost of investment / Annual cash inflow

Annual cash inflow = $18,000

Cost of investment = $86,000

Payback period = $86,000 / $18,000 = 4.78 years (rounded to 1 decimal place)

Therefore, the best choice is A, as it has the shortest payback period.

A Company with $810,000 in Operating Assets Is Considering the Purchase