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: 4 years 8.3 years 0.25 years 33.3 years
The correct answer is 4 Years
1. Payback Period = Initial Investment / Annual Cash Inflows
= $ 72,000/ $ 18,000
2. Annual Cash Inflows in this case is the reduction in the operating costs per year.