The directors of Godfrey and Glamorgan Limited are currently considering the replacement of part of their production line.Relevant data for machine Z are as follows: Which one of the following statements is correct?
The payback period for the proposed investment is (to the nearest month):

Question

The directors of Godfrey and Glamorgan Limited are currently considering the replacement of part of their production line.Relevant data for machine Z are as follows:  Which one of the following statements is correct?
The payback period for the proposed investment is (to the nearest month):

Quizplus · Accepted Answer

The payback period can be calculated by dividing the initial investment by the average annual cash inflow. 
Initial investment = $250,000 
Average annual cash inflow = ($30,000 + $60,000 + $75,000 + $84,000)/4 = $62,250 
Payback period = $250,000/$62,250 = 4.01 years or approximately 4 years and 1 month. 
Therefore, the correct answer is B) 2 years and 10 months, as it is the closest option to the calculated payback period. 
It is best for the company to invest in machine Z as it has a payback period of less than 4 years, which is considered acceptable.

The Directors of Godfrey and Glamorgan Limited Are Currently Considering