Anselmo Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention. What is the payback period in years for the machine approximated to two decimal points, assuming no taxes are paid?

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the initial investment to be recovered through the annual cash flows. To calculate the payback period, we need to divide the initial investment by the annual cash flow:

$76,000 / $23,214 = 3.27 years

Since the payback period is between three and four years, the best choice is option B.