(Ignore income taxes in this problem.) A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 and which is expected to reduce operating costs by $18,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to:

Question

Quizplus · Accepted Answer

Payback period is the time required for the company to recover its initial investment in the new asset. 
Payback period = Initial investment / Annual cash inflow

In this case, the initial investment is $72,000 and the annual cash inflow is $18,000. Therefore, payback period = $72,000 / $18,000 = 4 years. 
Since the payback period is less than the expected life of the machine, it is a good investment for the company. Therefore, choice A is the best choice.

(Ignore Income Taxes in This Problem