Question

A piece of equipment costs $30,000, and is expected to generate $8,500 of annual cash revenues and $1,500 of annual cash expenses. The disposal value at the end of the estimated 10-year life is $3,000. Ignoring income taxes, the payback period is:

A. 3.53 years
B. 3.86 years
C. 4.29 years
D. 6.98 years

some other period of time not noted

Answer 1

Answer:

C. 4.29 years

Explanation:

The computation of the payback period is shown below:

Payback period = Initial investment of the equipment ÷ Cash flows

where,

Initial investment = $30,000

And, the cash flows is

= $8,500 - $1,500

= $7,000

So the payback period is

= $30,000 ÷ $7,000

= 4.29 years

By dividing the initial investment by the cash flows we can get the payback period and the same is applied above.