A company with $800,000 in operating assets is considering purchasing a machine that costs $300,000 with an estimated salvage value of $40,000. The acquisition is expected to reduce operating costs by $55,000 in year 1, with a $5,000 increase in cost savings per year for each of the remaining years of its 6-year life. How long is the payback period?

Question

Quizplus · Accepted Answer

The payback period is calculated by determining how long it takes for the cumulative cash savings to equal the initial investment. The savings are $55,000 in year 1, $60,000 in year 2, $65,000 in year 3, $70,000 in year 4, $75,000 in year 5, and $80,000 in year 6. The cumulative savings reach $300,000 between years 4 and 5, specifically in 4.7 years.

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