Asked by Branton Wallace on Jun 30, 2024
Verified
A company with $810,000 in operating assets is considering the purchase of a machine that costs $86,000 and which is expected to reduce operating costs by $18,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)
A) 4.8 years
B) 9.4 years
C) 0.21 years
D) 45 years
Payback Period
The amount of time it takes for an investment to generate cash flows sufficient to recover its initial cost, commonly used to assess the feasibility of projects.
Operating Assets
Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes.
- Interpret the effects of depreciation, operational costs reduction, and salvage value on the cash flow of an investment project.
- Achieve the capability to evaluate the payback period for investment projects and appreciate its importance in strategizing investments.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
A
Explanation :
Payback period = Cost of investment / Annual cash inflow
Annual cash inflow = $18,000
Cost of investment = $86,000
Payback period = $86,000 / $18,000 = 4.78 years (rounded to 1 decimal place)
Therefore, the best choice is A, as it has the shortest payback period.
Annual cash inflow = $18,000
Cost of investment = $86,000
Payback period = $86,000 / $18,000 = 4.78 years (rounded to 1 decimal place)
Therefore, the best choice is A, as it has the shortest payback period.
Learning Objectives
- Interpret the effects of depreciation, operational costs reduction, and salvage value on the cash flow of an investment project.
- Achieve the capability to evaluate the payback period for investment projects and appreciate its importance in strategizing investments.