Belmont 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 $200,000.The equipment will have an initial cost of $1,000,000 and have an 8-year life.If there is no salvage value of the equipment,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. In this case, the initial investment is $1,000,000 and the annual increase in net income is $200,000. Therefore, the payback period can be calculated as:
Payback period = Initial investment / Annual cash inflow
Payback period = $1,000,000 / $200,000
Payback period = 5 years
Therefore, the correct answer is B) 3.08 years.