Solutions Inc.would like to purchase a new production machine for $300,000.The machine is expected to have a life of four years,and a salvage value of $50,000.Annual maintenance costs will total $30,000.Annual labor and material savings are predicted to be $150,000.The company's required rate of return is 6 percent.
What is the payback period for this investment (round to the nearest month)?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how many years it will take for the annual cash inflows to recover the initial investment.

Annual cash inflows = Annual labor and material savings - Annual maintenance costs 
Annual cash inflows = $150,000 - $30,000 
Annual cash inflows = $120,000

Payback period = Initial investment ÷ Annual cash inflows 
Payback period = $300,000 ÷ $120,000 
Payback period = 2.5 years = 2 years, 6 months

Therefore, the correct answer is choice C.