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Joe Vandelay buys a piece of equipment for $200,000. He puts down $40,000 and finances $160,000 from a local bank. Joe s opportunity cost is
Joe Vandelay buys a piece of equipment for $200,000. He puts down $40,000 and finances $160,000 from a local bank. Joe s opportunity cost is 5%, and the bank charges 10% on the loan. The after-tax cash flows generated from the equipment are $54,000 per year for the next 5 years.
Should Joe buy the equipment based on payback period if his required payback period is less than 3 years?
a. | Yes as payback period is 4.15 years. | |
b. | No as payback period is 3.70 years. | |
c. | No as payback period is 2.50 years. | |
d. | Yes as payback period is 2.85 years. |
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