Gamma Electronics
Gamma Electronics is considering the purchase of testing equipment that will cost $500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years.
-Refer to Gamma Electronics.If the firm has a 15% cost of capital,what's the discount payback period of the investment?

Question

Quizplus · Accepted Answer

Present value PV of Year 1 = 250,000/1.15 = 217,391 PV of Year 2 = 250,000/1.15² = 189,036 PV of Year 3 = 250,000/1.15³ = 164,379 By the end of year 3,the project produces a cumulative cash flow that's greater than $500,000.Thus the project earns back the initial $500,000 at some point during the third year. (500,000 - 217,391 - 189,036)/164,379 = 93,573/164,379 = 0.569 The discount payback period is 2.6 years.

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