Bev is considering purchasing a new button holer for her business. She estimates the machine will cost $90,000 and will be paid for in cash. Her cash savings from the first 4 years of operation of the machine will be $20,000 in year 1, $30,000 in year 2, $35,000 in year 3 and $35,000 in year 4. The payback period for the machine is:

Question

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The payback period is calculated by adding the cash savings until the initial investment is recovered. By the end of year 3, Bev has saved $85,000 ($20,000 + $30,000 + $35,000). In year 4, she needs an additional $5,000 to reach $90,000, which takes approximately 0.14 of a year ($5,000/$35,000). Thus, the payback period is 3.14 years.

Bev Is Considering Purchasing a New Button Holer for Her