A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.):
A) 0.25 years
B) 8.3 years
C) 4 years
D) 33.3 years

Question

Quizplus · Accepted Answer

Payback period = Cost of investment / Annual cash inflows

Cost of investment = $60,000
Annual cash inflows = $15,000

Payback period = $60,000 / $15,000 = 4 years

Therefore, the payback period for this machine is 4 years, making choice C the best option.

A Company with $500,000 in Operating Assets Is Considering the Purchase