Equipment A costing $100,000 is expected to generate $15,000 annually in cash inflows during its life of 7 years.Equipment B costing $150,000 is expected to generate $22,000 annually in cash inflows during its life of 8 years.Equipment C costing $80,000 is expected to generate $16,000 annually in cash inflows during its life of 6 years Rank the three investments in terms of payback period.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. Equipment C has the shortest payback period (80,000/16,000 = 5 years), followed by Equipment A (100,000/15,000 ≈ 6.67 years), and Equipment B (150,000/22,000 ≈ 6.82 years).

Equipment a Costing $100,000 Is Expected to Generate $15,000 Annually