A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.The payback period for this machine in years is closest to which of the following? (Ignore income taxes in this problem.)
A) 0.27 years.
B) 3.75 years.
C) 10.70 years.
D) 40.00 years.

Question

Quizplus · Accepted Answer

The payback period is the time required for the cash inflows (cost savings) to recover the initial investment. 
Payback period = Cost of investment / Annual cash inflows

In this case, 
Cost of investment = $75,000 
Annual cash inflows = $20,000

Payback period = $75,000 / $20,000 = 3.75 years

Therefore, the best choice is B.

A Company with $800,000 in Operating Assets Is Considering the Purchase