Patterson Corp.is considering the purchase of a new piece of equipment,which would have an initial cost of $500,000,a 7-year life,and $150,000 salvage value.The increase in net income each year of the equipment's life would be as follows: What is the payback period?

Question

Patterson Corp.is considering the purchase of a new piece of equipment,which would have an initial cost of $500,000,a 7-year life,and $150,000 salvage value.The increase in net income each year of the equipment's life would be as follows:  What is the payback period?

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how long it takes for the accumulated increase in net income to equal the initial cost of the equipment. In this case, we can see from the table that the cumulative net income for the first three years is $460,000, which is less than the initial cost of $500,000. However, the cumulative net income for the first four years is $535,000, which is greater than the initial cost, so the payback period is between three and four years. By calculating the average net income over the fourth and fifth years, we can determine that the payback period is approximately 3.55 years. Therefore, the best choice is A, as it has the shortest payback period.