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:

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.

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%