Question

A computer call center is going to replace all of its incandescent lamps with more energy-efficient fluorescent lighting fixtures. The total energy savings are estimated to be $1,300 per year, and the cost of purchasing and installing the fluorescent fixtures is $5,700. The study period is five years, and terminal market values for the fixtures are negligible. What is the simple payback period (to the integer year) of the investment?

Please only fill in the number of your calculated result in the blank, e.g., if the result is 7 years, fill in “7”.

Answer 1

Simple Payback Period

- The Payback Period Method refers to the period in which the proposed project will generate the cash inflows to recover the Initial Investment costs. It considers only three components such as Initial Investment costs, Economic life of the project and the annual cash inflows

- Payback period is the number of years taken to recover the total amount of money invested in the project. If the payback period is less than the enterprises required number of years, then the project should be accepted, Else it is rejected.

-The Payback Period = Initial Investment / Annual cash inflow

The Payback Period for the Project is calculated by using the following formula

Project’s Payback Period = Initial Investment Cost / Annual Cash Inflow

= $5,700 / $1,300 per year

= 4.38 Years

“Hence, the Simple Payback Period for the Project will be 4.38 Years”