A company is considering the purchase of a new piece of equipment for $90,000.Predicted annual net cash inflows from the investment are $36,000 (Year 1),$30,000 (Year 2),$18,000 (Year 3),$12,000 (Year 4),and $6,000 (Year 5).The average income from operations over the 5-year life is $20,400.The payback period is 3.5 years.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflows. In this case, the payback period is 2.5 years ($90,000 / $36,000). Therefore, the statement is false.

A Company Is Considering the Purchase of a New Piece