Summit Corp is considering the purchase of a new piece of equipment. The cost sa

Question

Summit 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 $175,000. The equipment will have an initial cost of $451,000 and have a 15 year life. If the salvage value of the equipment is estimated to be $76,000, what is the payback period?

Summit 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 $175,000. The equipment will have an initial cost of $451,000 and have a 15 year life. If the salvage value of the equipment is estimated to be $76,000, what is the payback period?

Explanation / Answer

Hi,

Please find the answer as follows:

Net Annual Cash Flow = Net Income + Depreciation
= 175000 + (451000 - 76000)/15 = 200000

Payback Period = Initial Investment/Net Annual Cash Flow = 451000/200000 = 2.255 or 2.26 years.

Thanks.

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