The Higgins Company has just purchased a piece of equipment at a cost of $120,000.This equipment will reduce operating costs by $40,000 each year for the next eight years.This equipment replaces old equipment that was sold for $8,000 cash.What is the new equipment's payback period? (Ignore income taxes in this problem.)

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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 $120,000 and the annual cash flow is $40,000. Therefore, the payback period is $120,000 / $40,000 = 3 years. However, we need to take into account the $8,000 cash received from the sale of the old equipment. This reduces the initial investment to $120,000 - $8,000 = $112,000. Therefore, the payback period is $112,000 / $40,000 = 2.8 years.

The Higgins Company Has Just Purchased a Piece of Equipment