Equipment A costing $80 000 is expected to generate $12 000 annually in cash inflows during its life of 8 years. Equipment B costing $120 000 is expected to generate $17 000 annually in cash inflows during its life of 8 years. Equipment C costing $60 000 is expected to generate $8000 annually in cash inflows during its life of 9 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 A has a payback period of $80,000 / $12,000 = 6.67 years, Equipment B has a payback period of $120,000 / $17,000 = 7.06 years, and Equipment C has a payback period of $60,000 / $8,000 = 7.5 years. Therefore, the ranking is A1, B2, C3.

Equipment a Costing $80 000 Is Expected to Generate $12