Question

ABC Steel Co. is considering buying a new machine in order to increase its production capacity using new technology. Details about the new equipment are below: Purchase Cost $300,000 Savings offered by the new machine $62,500 per year Life of the new machine 15 years The corporate policy of ABC Steel Co. is to reject all proposal with a payback period of more than 7 years. Therefore, would ABC buy the new machine?
a. 7.2 years
b. 6.8 years
c. 4.8 years
d. 12.4 years

Answer 1

Answer:

payback period is lesser than 15 years we can say that they should buy the machine

so correct option is c. 4.8 years  

Explanation:

given data

Purchase Cost = $300,000

Savings offered = $62,500 per year

Life of machine = 15 years

to find out

Payback period

solution

first we get here Payback period that is express as

Payback period =  purchase cost ÷ savings   ...........1

put here value we get

Payback period = $\frac{300000}{62500}$

Payback period = 4.8 years

and here payback period is lesser than 15 years we can say that they should buy the machine

so correct option is c. 4.8 years