Wyer’s Accounting Museum is exploring the purchase of a new building with a usef

Question

Wyer’s Accounting Museum is exploring the purchase of a new building with a useful life of 20 years to use as its main gallery space. The building will cost $1,308,000. Once it has been purchased, the museum will terminate its current lease, which costs $60,900 per year. The new gallery will allow the museum to display more of its permanent collection, as well as to showcase traveling exhibits. The increased exhibit space, along with the new building’s location, is expected to increase admissions revenue by $26,300 per year. Calculate the payback period for the proposed investment in the building. Assume that all cash flows occur evenly throughout the year.

Explanation / Answer

The cost of new building = 1308000

Savings on Termination of current lease= 60900

Increased revenue from the new building= 26300

Total savings per Year = Savings on termination of lease + Increased revenue = 60900+ 26300 =87200

Payback period= Total Savings/ Initial Cost = 1308000/87200 = 15 Years

So, Wyer’s accounting Museum will be able to recover its cost in 15 years for the proposed investment in the building.

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