A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000
(Year 1), $30,000
(Year 2), $18,000
(Year 3), $12,000
(Year 4), and $6,000
(Year 5). The average income from operations over the five-year life is $20,400. The payback period is 3.5 years.

Question

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 
(Year 1), $30,000 
(Year 2), $18,000 
(Year 3), $12,000 
(Year 4), and $6,000 
(Year 5). The average income from operations over the five-year life is $20,400. The payback period is 3.5 years.

Quizplus · Accepted Answer

To calculate the payback period, we divide the initial investment ($90,000) by the annual net cash inflow. 
Payback period = $90,000 / $36,000 = 2.5 years. 
Since the payback period is less than the 3.5 year life of the equipment, the investment is considered acceptable. Therefore, the statement "the payback period is 3.5 years" is false.

A Company Is Considering the Purchase of a New Piece