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

Question

Summit Corp is considering the purchase of a new piece of equipment. The equipment will initially cost $400,000, have a 5 year useful life, and an annual increase in NI of $100,000. If the residual value of the equipment is estimated to be $100,000, what is the payback period?

Summit Corp is considering the purchase of a new piece of equipment. The equipment will initially cost $400,000, have a 5 year useful life, and an annual increase in NI of $100,000. If the residual value of the equipment is estimated to be $100,000, what is the payback period?

Explanation / Answer

Depreciation expense = (400000-100000/5) = 60000 per year

Annual cash flow = 100000+60000 = 160000

Payback period = 400000/160000 = 2.5 years

so answer is d) 3 Years

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