The payback period of the machine is 5 years when the cost of acquiring a machine is $10,000 with a net yearly cash flow is $2,000 per year.
The payback period is the method of identifying the recovery duration of the invested amount on a long-term project. It is expressed in terms of years.
Given values:
Cost of acquiring a machine: $10,000
Yearly cash flows: $2,000
Computation of payback period of the machine:
[tex]\rm\ Payback \rm\ period \rm\ on \rm\ machine=\frac{\rm\ Cost \rm\ of \rm\ acquiring \rm\ a \rm\ machine}{\rm\ Yearly \rm\ cash \rm\ flows} \\\rm\ Payback \rm\ period \rm\ on machine=\frac{\$10,000}{\$2,000} \\\rm\ Payback \rm\ period \rm\ on machine=5\rm\ years[/tex]
Therefore, when an investment is made on a machine of $10,000 with annual cash flows of $2,000, then the payback period comes out to be as 5 years.
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