The net initial investment for a piece of construction equipment is $2,900,000. Annual cash inflows are expected to increase by $500,000 per year. The equipment has an 10-year useful life. What is the payback period?
A) 10.00 years
B) 7.40 years
C) 5.80 years
D) 4.80 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the annual cash inflow.

Payback period = Net initial investment / Annual cash inflow

For this particular equipment, the annual cash inflow is expected to increase by $500,000 per year and the useful life is 10 years. So the total cash inflow over 10 years is:

Total cash inflow = Annual cash inflow x Number of years
Total cash inflow = $500,000 x 10
Total cash inflow = $5,000,000

To calculate the payback period, we now divide the net initial investment by the annual cash inflow:

Payback period = $2,900,000 / $500,000
Payback period = 5.8 years

Therefore, the answer is C, which is 5.8 years.

The Net Initial Investment for a Piece of Construction Equipment