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18 November, 21:53

The Easton manufacturing Company is looking to replace its conveyor belt system. A new system will cost $345,000, and will result in cost savings of $220,000 in the first year, followed by savings of $100,000 per year over the following 3 years. The payback period for this project is closest to:

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  1. 18 November, 21:55
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    2.25 years

    Explanation:

    The computation of payback period is shown below:-

    Year Cash flows Cumulative Cash flows

    0 ($345,000) ($345,000)

    1 $220,000 ($125,000)

    2 $100,000 ($25,000)

    3 $100,000 $75,000

    4 $100,000 $175,000

    Payback period = Last period with a negative cumulative cash flow + (Absolute value of cumulative cash flows at that period : Cash flow after that period)

    =2 + ($25,000 : $100,000)

    = 2.25 years

    So, for computing the payback period we simply applied the above formula.
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