A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from the investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4), and $6,000 (year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflows until the investment is paid back. In this case, the payback period can be calculated as follows:

Payback period = $90,000 ÷ $36,000/year
Payback period = 2.5 years

Since the payback period is less than the 5-year life of the equipment, the investment is considered financially viable. Additionally, the average income from operations over the 5-year life exceeds the initial investment, which is also a positive sign for the investment. Therefore, the statement is true.

A Company Is Considering the Purchase of a New Piece