The net initial investment for a piece of construction equipment is $3,000,000.Annual cash inflows are expected to increase by $500,000 per year.The equipment has an 8-year useful life.What is the payback period?
A) 8 years
B) 6.5 years
C) 6 years
D) 5 years

Question

Quizplus · Accepted Answer

Payback period is calculated by dividing the net initial investment by the expected annual cash inflows.
Payback period = Net initial investment / Annual cash inflows
In this case, 
Payback period = $3,000,000 / $500,000 per year
Payback period = 6 years 
Therefore, the best choice is C, which is 6 years.

The Net Initial Investment for a Piece of Construction Equipment