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Newport Corporation is considering investing $65,000 in equipment to produce a new product.The useful service life of the equipment is estimated to be ten years,with no salvage value.Straight-line depreciation is used.The company estimates that production and sale of the new product will increase net income by $6,500 per year.
-The payback period of this investment is:

Question

Quizplus · Accepted Answer

The payback period is the length of time it takes for an investment to recoup its initial cost. In this case, the initial cost is $65,000 and the estimated increase in net income is $6,500 per year. Therefore, the payback period can be calculated as:
Payback period = Initial cost / Annual net income
Payback period = $65,000 / $6,500 per year
Payback period = 10 years / 1 year
Payback period = 10 years
Since the payback period is 10 years, which is longer than the useful service life of the equipment, the investment does not meet the payback period criteria. However, since the question asks for the best choice among the given options, the answer is B, which represents the closest option to the correct calculation.

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