(Ignore income taxes in this problem.) A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback period for this machine in years is closest to:

Question

Quizplus · Accepted Answer

Payback period refers to the time taken to recover the initial investment from the stream of cash flows generated by the investment. In this case, the initial investment is $75,000, and the annual cash inflow (cost savings) is $20,000.

To calculate the payback period, we divide the initial investment by the annual cash inflow:

Payback period = Initial investment / Annual cash inflow

Payback period = $75,000 / $20,000

Payback period = 3.75 years

Therefore, the payback period for the machine is 3.75 years, which is the closest to option C. This means that it will take 3.75 years for the company to recover the initial investment from the cost savings generated by the machine. This is a relatively short payback period, indicating a good investment opportunity for the company.

(Ignore Income Taxes in This Problem