Nelson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $100,000.The equipment will have an initial cost of $400,000 and have a 5-year life.If the salvage value of the equipment is estimated to be $75,000,what is the payback period? Ignore income taxes.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash flow increase. The initial cost of the equipment is $400,000, and it generates an annual cash flow increase of $100,000. Therefore, the payback period is $400,000 / $100,000 = 4 years. The salvage value is not considered in the basic payback period calculation.