Gator Manufacturing is considering the purchase of equipment at a cost of $7,000.Gator expects the equipment to generate cash inflows of $2,000 each year for the next ten years.The payback period for the equipment is:

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes to recover the initial investment in a project or equipment. To calculate the payback period, we divide the initial investment by the expected annual cash inflows.

Payback period = Initial investment / Expected annual cash inflows

Payback period = $7,000 / $2,000 per year

Payback period = 3.5 years

Therefore, the best choice is C, with a payback period of 3.5 years. This means that Gator Manufacturing will recover their initial investment in the equipment in 3.5 years through the expected annual cash inflows of $2,000. After that, the equipment will continue to generate cash inflows for another 6.5 years.

Gator Manufacturing Is Considering the Purchase of Equipment at a Cost