Lawson Co. is considering purchasing a new machine which will cost $350000 but which will decrease costs each year by $100000. The useful life of the machine is 10 years. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $35000/year. The cash payback period is

Question

Quizplus · Accepted Answer

The cash payback period is the length of time it takes for the initial investment to be recovered through cash inflows. In this case, the initial investment is $350000 and the annual decrease in costs is $100000, so the cash inflow each year is $100000.

To find the cash payback period, we divide the initial investment by the annual cash inflow:

$350000 ÷ $100000/year = 3.5 years

Since the cash payback period is less than the useful life of the machine (10 years), and the machine will continue to provide cost savings beyond the payback period, it is a good investment. Therefore, the best choice is B.

Lawson Co Is Considering Purchasing a New Machine Which Will Cost