Question

Jordan Company is considering the purchase of a machine with the following data:
Initial cost $150,000
One-time training cost 12,000
Annual maintenance costs 15,000
Annual cost savings 75,000
Salvage value 20,000
The cash payback period is

A) 2.70 years.
B) 2.50 years.
C) 2.37 years.
D) 2.17 years

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

Initial cost = $150,000

One-time training cost = 12,000

Annual maintenance costs = 15,000

Annual cost savings = 75,000

Salvage value = 20,000

Cash payback period = Initial Investment ÷ Net annual cash inflows

                                   = [($150,000 + $12,000) ÷ ($75,000 - $15,000)]

                                   = $162,000 ÷ $60,000

                                   = 2.7 years