Question

a company is interested in a piece of equipment that costs 30,000 dollars. It will have a market value of 5000 at the end of its six year life. if it is expected to increase the revenue by 7000 per year for the first 3 years, then by 2000 for the rest of its life. if the company's MARR is 20% per year, what is the simple payback period for this equipment?

Answer 1

Initial Cost = 30,000

Salvage Value = 5,000

Life = 6 years

Revenues for first 3 years = 7,000

Revenues for last 3 years = 2,000

MARR = 20%

Calculating the simple pay-back period.

Year	Cash Flow	Net Cash Flow
Year 0	$-30,000.00	$-30,000.00
Year 1	$7,000.00	$-23,000.00
Year 2	$7,000.00	$-16,000.00
Year 3	$7,000.00	$-9,000.00
Year 4	$2,000.00	$-7,000.00
Year 5	$2,000.00	$-5,000.00
Year 6	$2,000 + $5,000 = $7,000.00	$2,000.00

Simple pay-back period = 5 + (5,000 ÷ 7,000) = 5.71 years

The simple pay-back period = 5.71 years