A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is:
A) 2.50 years.
B) 3.50 years.
C) 3.00 years.
D) 4.50 years.
E) 4.25 years.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. By the end of year 3, the cumulative inflows are $84,000. In year 4, an additional $6,000 is needed, which takes 0.5 years, making the payback period 3.5 years.

A Company Is Considering the Purchase of a New Piece