A piece of equipment costs $30,000, and is expected to generate $8,500 of annual cash revenues and $1,500 of annual cash expenses. The disposal value at the end of the estimated 10-year life is $3,000. Ignoring income taxes, the payback period is:

Question

Quizplus · Accepted Answer

The payback period can be calculated by dividing the initial cost of the equipment by the annual net cash inflows.

Annual net cash inflows = Annual cash revenues - Annual cash expenses = $8,500 - $1,500 = $7,000

Payback period = Initial cost / Annual net cash inflows = $30,000 / $7,000 = 4.29 years

Therefore, the best choice is C.

A Piece of Equipment Costs $30,000, and Is Expected to Generate