Question

Exercise 24-8 Payback period and accounting rate of return on investment LO P1, P2 B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment's product each year. The expected annual income related to this equipment follows. $ 150,000 Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses 80,000 20,000 15,000 Total costs and expenses 115,000 Pretax income Income taxes (20%) 35,000 7,000 Net income $ 28,000 1. Compute the payback period. Payback Period Choose Numerator: 1. Choose Denominator: = Payback Period Payback period

Answer 1

Answer:- 1)-Payback period = 5 years.

Explanation- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

In case when cash inflow are even, the formula to calculate payback period is:

Payback period =Initial investment / Cash Inflow per period

= $240000/$48000

= 5 years

Where- Annual cash inflow = Net income+ Annual depreciation

= $28000+$20000

= $48000