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Assume that a company is considering purchasing a new piece of equipment for $240,000 that would have a useful life of 10 years and no salvage value. The new equipment would cost $20,000 per year to operate and it would replace an old piece of equipment that costs $60,000 per year to operate. The old equipment currently being used could be sold for a salvage value of $40,000. What is the annual incremental net operating income provided by the new equipment

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Tundexi

Answer:

5 years

Explanation:

Initial Cost = New Equipment Purchase Price - Salvage value of Old Equipment

Initial Cost = $240,000 - $40,000

Initial Cost = $200,000

Net Annual cash Flows = Annual savings - Annual costs

Net Annual cash Flows = $60,000 - $20,000

Net Annual cash Flows = $40,000

Pay back period = Initial cost / Net Annual Cash flows

Pay back period = $200,000/$40,000

Pay back period = 5 years