Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the payback period for the investment Saturn Ltd.is considering?
A)5.63 years
B)5.78 years
C)6.05 years
D)5.26 years
E)The project does not payback.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out the length of time it takes for the annual cash savings to equal the initial investment.

Annual savings = $32,000
Initial investment = $180,000 + $5,000 + $8,500 = $193,500
Salvage value = $18,000

Payback period = (Initial investment - Salvage value) / Annual savings
Payback period = ($193,500 - $18,000) / $32,000
Payback period = 5.96875

Therefore, the payback period is approximately 6.05 years. Choice C is the closest option.

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