Question

The net initial investment for a piece of construction equipment is $2,000,000. Annual cash inflows are expected to increase by $400,000 per year. The equipment has an 8-year useful life. The company's hurdle rate is 12%. What is the payback perioda. 8 years
b. 7 years
c. 6 years
d. 5 years

Answer 1

Answer:

d. 5 years

Explanation:

* Assuming Simple payback has been asked in the question rather discounted.

Initial Cost = $2,000,000

Cash inflows = $400,000 per year

Interest rate = 12%

Payback = Initial cost / Cash inflow

Payback = $2,000,000 / $400,000 per year

Payback = $2,0 / $4 per year

Payback = 5 years

So, the payback period of this equipment is 5 years.