Question

As the owner of a business, you are responsible for making decisions on technological upgrades. A vendor of point of sales systems (POS) has presented a proposal to replace the existing system in your stores with one that, among other benefits, can increase employee productivity by, allowing you to meet the increasing demand for your services without adding headcount. Without the new technology your company will need to retain three employees at a cost of $35,000 per year per employee. With the new technology, this headcount would not be required. The one-time cost of implementing the new technology (capital investment) is $160,000. In addition, the company will incur $25,000 per year in software licenses and maintenance. What would be the approximate payback period of this investment? State your answer in years.

Answer 1

Answer:

2 years

Explanation:

Payback can be calculated by identifying net savings of employing this new system.

Net savings = Savings from reduced labor costs - Annual license and maintenance fee

Net Savings = (35,000 * 3) - 25,000 = $80,000 saving / year

Initial outlay = $160,000

Payback = initial outlay / savings per year = 160000 / 80000 = 2 years

So it takes 2 years to recover the initial outlay.

Hope that helps.