Sierra Discount Drugstore bought a new high-speed photo printer for customers to be able to bring in their digital pictures to make high-quality prints.Its useful life is 6 years.The printer cost $8,170 and will generate annual cash inflows of $2,150.The residual value of the printer is $1,320.The payback period in years is closest to:

Question

Quizplus · Accepted Answer

To find the payback period, we need to calculate how long it will take to recover the initial investment.

First, we need to find the cumulative cash inflow each year:

Year 1: $2,150 
Year 2: $4,300 
Year 3: $6,450 
Year 4: $8,600 
Year 5: $10,750 
Year 6: $12,900

We can see that it takes a little over 3 years to reach the cumulative cash inflow of $8,170 (the initial investment).

To find the exact payback period, we can use interpolation:

Payback period = Year before full recovery + (Unrecovered investment at start of year / Cash inflow during year)

Payback period = 3 + (2,020 / 2,150)

Payback period = 3.80

Therefore, the payback period is 3.80 years, which is closest to option C (3.80).

Sierra Discount Drugstore Bought a New High-Speed Photo Printer for Customers