Meulo Company is considering the purchase of production equipment that costs $800,000.The equipment is expected to generate an annual cash flow of $250,000 and have a useful life of five years with no salvage value.The firm's cost of capital is 12 percent.The company uses the straight-line method of depreciation with no mid-year convention.There are no income taxes. The payback period in years for the project is

Question

Quizplus · Accepted Answer

The payback period is the length of time it takes for a project to recoup its initial investment.
To calculate the payback period of the project, we need to divide the initial investment by the annual cash inflows until the initial investment amount is fully recovered.
For this project, the annual cash inflow is $250,000 and the initial investment is $800,000; thus, the payback period is:

Payback Period = Initial Investment / Annual Cash Inflow
Payback Period = $800,000 / $250,000
Payback Period = 3.20 years

Therefore, the best choice is option B) 3.20 years, as it represents the number of years it will take the project to recoup its initial investment.

Meulo Company Is Considering the Purchase of Production Equipment That