Answer:
It will take 7.5 years to cover the initial investment. If the company take into account the tax shield of the depreciation expense, the payback period will be lower.
Explanation:
Giving the following information:
Initial investment= $16,000
Useful life= 8 years
Salvage value= $2,000
Cash inflows= $2,000
The payback period is the time required to cover the initial investment.
Year 1= 2,000 - 16,000= -14,000
Year 2= 2,000 - 14,000= -12,000
Year 3= 2,000 - 12,000= -10,000
Year 4= 2,000 - 10,000= -8,000
Year 5= 2,000 - 8,000= -6,000
Year 6= 2,000 - 8,000= -4,000
Year 7= 2,000 - 4,000= -2,000
Year 8= 4,000 - 2,000= 2,000 (Assuming the asset is sold for its salvage value)
To be more accurate:
(2,000/4,000)= 0.5
It will take 7.5 years to cover the initial investment. If the company take into account the tax shield of the depreciation expense, the payback period will be lower.
