4.1. Payback Period Explanation

Try these first

1. 1.

   What is the payback period?

   Hint

   Think about recovering your initial expenditure.

2. 2.

   Define economic life.

   Hint

   Consider how long a machine effectively serves its purpose.

3. 3.

   What is the payback period?

   • A method to calculate depreciation
   • Time taken to recover investment
   • The lifespan of a machine

   Hint

   It focuses on cash flow recovery.

4. 4.

   True or False: The economic life of equipment is the time during which it is cost-effective to use.

   • True
   • False

   Hint

   Think about how long machines remain beneficial.

5. 5.

   A factory has two machines: Machine A costs 60 lakh and earns 12 lakh per year; Machine B costs 48 lakh but earns 14 lakh for the first 4 years and drops to 6 lakh after that. Calculate the payback period for both machines and suggest which to select.

   Hint

   Calculate each machine's cumulative profits yearly to see when they reach the initial investment.

6. 6.

   Evaluate a scenario where a company has to choose between retaining an older machine that costs 40 lakh with expected annual profits of 8 lakh and a new machine at 50 lakh with 9 lakh for 5 years. Determine if changing the machine is justified.

   Hint

   Focus on potential efficiency gains from the new machine.