Equipment A costing $64 000 is expected to generate $12 000 annually in cash inflows during its life of 10 years. Equipment B costing $130 000 is expected to generate $18 000 annually in cash inflows during its life of 7 years. Equipment C costing $90 000 is expected to generate $13 000 annually in cash inflows during its life of 9 years. Rank the three investments from best to worst (1 to 3) in terms of payback period.

Question

Quizplus · Accepted Answer

To calculate the payback period, divide the initial investment by the annual cash inflow. For Equipment A: $64,000 / $12,000 = 5.33 years. For Equipment B: $130,000 / $18,000 = 7.22 years. For Equipment C: $90,000 / $13,000 = 6.92 years. Thus, the ranking from best to worst in terms of shortest to longest payback period is A, C, B.

Equipment a Costing $64 000 Is Expected to Generate $12