Fire Corp. is considering the purchase of a new piece of equipment. The equipmen

Question

Fire Corp. is considering the purchase of a new piece of equipment. The equipment costs $51,100, and will have a salvage value of $5,110 after nine years. Using the new piece of equipment will increase Fire's annual cash flows by $6,110. a. What is the payback period for the new piece of equipment? (Round your answer to 2 decimal places.) Payback Period Years b. Suppose that the increase in cash flows were $10,110 in the first year, then decreased by $1,000 each year over the life of the equipment. What is the payback period for the equipment? (Round your answer to 2 decimal places.) Payback Period Years

Explanation / Answer

a Payback period = 51100/6110= 8.36 years b Year Cash flows Cumulative cash flows Now -51100 -51100 1 10110 -40990 2 9110 -31880 3 8110 -23770 4 7110 -16660 5 6110 -10550 6 5110 -5440 7 4110 -1330 8 3110 1780 9 7220 9000 Payback period = 7+(1330/3110)= 7.43 years

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