A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.):


Multiple Choice
0.25 years
8.3 years
4 years
33.3 years

To determine the payback period for the machine, we use the formula:

\[
\text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Cash Inflows (or Savings)}}
\]

Here:
- Initial Investment = $60,000 (the cost of the machine)
- Annual Cash Savings = $15,000 (the annual reduction in operating costs)

Now, let's calculate:

\[
\text{Payback Period} = \frac{60,000}{15,000} = 4 \, \text{years}
\]

Thus, the payback period for the machine is **4 years**.

### Answer: 4 years

Would you like further details or explanations? Here are some related questions you might find useful:

1. What are the advantages and disadvantages of using the payback period method for investment decisions?
2. How is the payback period different from the net present value (NPV) method?
3. What happens to the payback period if the savings fluctuate yearly instead of being constant?
4. Can the payback period method account for the time value of money?
5. How would income taxes affect the calculation of the payback period?

#### Tip:
The payback period is a useful tool to quickly assess the risk of an investment, but it doesn't account for the profitability or time value of money beyond the break-even point.

A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.):

Multiple Choice
- 0.25 years
- 8.3 years
- 4 years
- 33.3 years

Learn how to calculate the payback period for a machine investment that costs $60,000 and provides annual savings of $15,000. This financial problem uses the payback period formula to determine the time required to recover the initial investment. Suitable for Grades 11-12 and college-level students.

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