A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 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:
A)4 years
B)8.3 years
C)0.25 years
D)33.3 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how long it takes for the machine to generate enough cost savings to recover its initial cost.

Payback period = Initial cost / Annual cost savings

In this case, the initial cost is $72,000 and the annual cost savings are $18,000.

Payback period = $72,000 / $18,000 per year = 4 years

Therefore, the payback period for this machine is 4 years. This means that the company will recover the cost of the machine in 4 years through the cost savings generated by the machine. As the payback period is relatively short, the purchase of the machine seems like a good decision.

A Company with $600,000 in Operating Assets Is Considering the Purchase