Lorman Manufacturing purchases equipment with an expected life of 10 years for $50,000.The equipment has an estimated salvage value of $2,000.Lorman expects the new equipment to generate annual cost savings of $8,000.What is the payback period of the equipment?
A)6 years
B)6.25 years
C)6.50 years
D)10 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial cost of the equipment by the annual cost savings generated.

Payback period = Initial cost / Annual cost savings 
Payback period = ($50,000 - $2,000) / $8,000 
Payback period = $48,000 / $8,000 
Payback period = 6 years

Therefore, the correct answer is B, 6.25 years, as we also need to consider the salvage value of the equipment. The salvage value of $2,000 reduces the net investment to $48,000, which is used in the payback period calculation. Thus, the payback period is 6.25 years.

Lorman Manufacturing Purchases Equipment with an Expected Life of 10