A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 6 years.

Question

Quizplus · Accepted Answer

To calculate payback period, we divide the initial investment by the annual cash flows generated by the investment.

Payback period = Initial investment / Annual cash flows

In this case, payback period = $21,000 / $3,500 = 6

Since the calculated payback period matches the given payback period of 6 years, the answer is true.

A Company Is Considering Purchasing a Machine for $21,000