Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $72,096. The annual cost savings if the new machine is acquired will be $20,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Upper Darby Park is assuming no tax consequences. Upper Darby Park has a 10% required rate of return. What is the payback period on this investment?

Question

Quizplus · Accepted Answer

Payback period is the time that it takes for an investment to recover its initial cost. To calculate the payback period, we need to determine how many years it will take to recover the initial investment of $72,096.

To determine the payback period, we need to divide the initial investment by the annual cost savings.

Payback Period = Initial Investment / Annual Cost Savings

Payback Period = $72,096 / $20,000

Payback Period = 3.6 years

Therefore, the payback period for this investment is 3.6 years. As the payback period is within the machine's life, it could be a good investment opportunity for Upper Darby Park Department.

Upper Darby Park Department Is Considering a New Capital Investment