Palmer Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $100,000.The equipment will have an initial cost of $400,000 and have a 7-year life.If the salvage value of the equipment is estimated to be $75,000,what is the payback period?

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes for the initial investment to be recovered from the annual cash flows. In this case, the initial investment is $400,000 and the annual cash flow is $100,000. Therefore, the payback period is 4 years.