Landscaping Inc.would like to purchase a tractor for $425,000.The tractor is expected to have a life of five years,and no salvage value.Annual maintenance costs will total $12,500.Annual labor and material savings are predicted to be $118,750.The company's required rate of return is 8 percent.
What is the payback period for this investment (round to the nearest month)?

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net savings. The net savings are $118,750 (savings) - $12,500 (maintenance costs) = $106,250. The payback period is $425,000 / $106,250 = 4 years.