Question

Palmer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $100,000. The equipment will have an initial cost of $400,000 and have a 7-year life. If the salvage value of the equipment is estimated to be $75,000, what is the payback period?

2.73 years

7.00 years

4.00 years

4.75 years

Answer 1

Ans: Option 1:2.73 Years is correct

Pay Back period= initial Investment/Net Annual Cash Inflows

                                =$400,000/$146,429

                                =2.73 Years

Annual Cash Inflows=Net income after tax + Depreciation

                                                =$100,000+$46,429=$146,429

Depreciation=Cost-salvage value/No of years

                                =$400,000-$75,000/7=$46,429

Note: Payback period means a duration by which an initial investment is recovered in a period