Malive Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $119,000.The annual cost savings if the new machine is acquired will be $35,000.The machine will have a 5-year life,at which time the terminal disposal value is expected to be zero.Malive Park is assuming no tax consequences.Malive Park has a 12% required rate of return.What is the payback period for the investment?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how many years it will take to recover the initial investment. 
Payback period = Initial investment / Annual cost savings 
Payback period = $119,000 / $35,000 
Payback period = 3.4 years 
Therefore, the payback period for the investment is 3.4 years. Since this is less than the machine's 5-year life, it is a good investment. The best choice is option B.

Malive Park Department Is Considering a New Capital Investment