Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | }
\hline \text { Year 1 } & 100,000 \
\hline \text { Year 2 } & 100,000 \
\hline \text { Year 3 } & \$ 125,000 \
\hline \text { Year 4 } & \$ 125,000 \
\hline \text { Year 5 } & \$ 75,000 \
\hline
\end{array}$$
What is the payback period?

Question

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | } 
\hline \text { Year 1 } & 100,000 \
\hline \text { Year 2 } & 100,000 \
\hline \text { Year 3 } & \$ 125,000 \
\hline \text { Year 4 } & \$ 125,000 \
\hline \text { Year 5 } & \$ 75,000 \
\hline
\end{array}$$
What is the payback period?

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. In this case, the initial investment is $350,000. The cash flows generated in the first three years are $100,000, $100,000, and $125,000, respectively. This totals $325,000. The remaining $25,000 of the initial investment is generated in the fourth year. Therefore, the payback period is 3.2 years.

Sun Company Is Considering Purchasing New Equipment Costing $350,000 What Is the Payback Period? A) 4 Years B) 3

Sun Company Is Considering Purchasing New Equipment Costing $350,000 What Is the Payback Period?
A) 4 Years
B) 3