A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.The payback period for this machine in years is closest to:
A) 0.27 years.
B) 3.75 years.
C) 10.7 years.
D) 40 years.

Question

Quizplus · Accepted Answer

Payback period = Cost of investment / Annual cash inflows
Cost of investment = $75,000
Annual cash inflows = $20,000
Payback period = 75000 / 20000 = 3.75 years.
Therefore, the best choice is option B.

A Company with $800,000 in Operating Assets Is Considering the Purchase