Welcher, Inc.plans to purchase equipment with a cost of $142,500.The company expects annual net cash inflows from the equipment of $30,000.The equipment has an estimated life of 8 years, no estimated salvage life, and a required rate of return is 6%.The payback period for the equipment is closest to
A)1 year.
B)1.5 years.
C)4.8 years.
D)8 years.

Question

Quizplus · Accepted Answer

Payback period is the time required to recover the initial investment in a project.

To calculate payback period, we need to divide the initial investment by the expected annual net cash inflows from the equipment.

Payback period = Initial investment / Annual net cash inflows

Payback period = $142,500 / $30,000 = 4.75 years

Since the payback period is less than 8 years (the estimated life of the equipment), the investment is acceptable.

Therefore, the best choice is C, with a payback period of 4.8 years (rounded up to the nearest year).