The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:
A) 2 years
B) 2.5 years
C) 3 years
D) Cannot be determined because of insufficient data

Question

Quizplus · Accepted Answer

The annual cash flow is 40% of $250,000, which is $100,000. The payback period is the time it takes for the cash flows to cover the initial investment. After 2 years, $200,000 is recovered, and after 2.5 years, the full $250,000 is recovered.

The Cost of a New Machine Is $250,000