A company is considering investing $57,000 in a machine that will last for five years, after which time it will have no value. The machine will generate additional revenue of $190,000 each year. Annual running costs, including depreciation of $11,400 will amount to $168,400. Assuming that all cash flows occur evenly, the payback period of the investment in the machine is closest to:
A) 2 years 8 months
B) 1 year 9 months
C) 1 year 7 months
D) 2 years 6 months

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the initial investment to be recovered from the cash flows generated by the investment. In this case, the initial investment is $57,000 and the annual cash flow is $190,000 - $168,400 = $21,600. Therefore, the payback period is $57,000 / $21,600 = 2.64 years, or approximately 1 year 7 months.

A Company Is Considering Investing $57,000 in a Machine That