Question

Sandy's Soda Co. is planning to purchase new equipment that costs $56,000 and will save on operating costs for the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5. The payback period for the cooling equipment is ______ years.

Answer 1

Answer:

It will take 2.6 years to cover the initial investment.

Explanation:

Giving the following information:

Initial investment= $56,000

Cash flows:

Cf1= $21,500

Cf2= 23,100

Cf3= $19,000

The payback period is the time required to cover the initial investment.

Year 1= 21,500 - 56,000= -34,500

Year 2= 23,100 - 34,500= -11,400

Year 3= 19,000 - 11,400= $7,600

To be more accurate:

(11,400/19,000)= 0.6

It will take 2.6 years to cover the initial investment.

Answer 2

The payback period is the time interval or the time taken by the business to recoup its investment amount and earn profits after the determined payback period. It is the measurement tool used by the investors and financial experts to know the investment returns.

The payback period for the cooling equipment is 2.6 years.

Computation:

Given:

Initial investment= $56,000

Cash flows of 5 years.

The payback period schedule is attached in the image below.

$\text{Payback period}=\text{Year of payback}+\dfrac{\text{Final amount}}{\text{Cash flow of next year}}\\\\=2\;\text{years}+\dfrac{\ 11,400}{\ 19,000}\\\\=2.06\;\text{years}$

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