Gateway Graphics is considering an investment in new printing equipment costing $502,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $122,000 the first year,$158,000 the second year,and $160,000 every year thereafter until the fifth year.What is the payback period for this investment? The residual value is zero.(Round your answer to two decimal places.)
A) 4.30 years
B) 3.39 years
C) 2.80 years
D) 3.11 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the annual net cash inflows until the total investment is recovered:
Payback period = Initial investment / Annual net cash inflows
Payback period = $502,000 / $122,000 = 4.11 years (including the first year)
Payback period = $380,000 / $158,000 = 2.41 years (including the second year)
Payback period = $222,000 / $160,000 = 1.39 years (after the second year)
Total payback period = 2.41 + 1.39 = 3.80 years
Therefore, the payback period for this investment is 3.80 years or 3.39 years (rounded to two decimal places), which is less than the five-year life of the equipment. The best choice is option B.

Gateway Graphics Is Considering an Investment in New Printing Equipment