Caliber Company is considering the purchase of a new machine costing $838,000.The company's management is estimating that the new machine will generate additional cash flows of $190,000 a year for ten years and have a salvage value of $52,000 at the end of ten years.What is the machine's payback period?

Question

Quizplus · Accepted Answer

The payback period is the time required for the company to recover its initial investment. To calculate the payback period, we need to divide the initial investment by the annual cash flow generated by the new machine:

Payback period = Initial investment ÷ Annual cash flow

Initial investment = $838,000

Annual cash flow = $190,000

Payback period = $838,000 ÷ $190,000 = 4.41 years

Therefore, the best choice is C) 4.41 years.

Caliber Company Is Considering the Purchase of a New Machine