Lorman Manufacturing purchases equipment with an expected life of 10 years for $50,000.The equipment has an estimated salvage value of $2,000.Lorman expects the new equipment to generate cost savings of $8,000.What is the payback period for the equipment?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the annual cash savings generated by the equipment.

Initial investment = $50,000 - $2,000 = $48,000

Annual cash savings = $8,000

Payback period = $48,000 ÷ $8,000 = 6 years

Therefore, the answer is B) 6.25 years, which is closest to 6 years.

Lorman Manufacturing Purchases Equipment with an Expected Life of 10