Homework SourseX Company is considering an upgrade to its computer equipmen
X Company is considering an upgrade to its computer equipment that will cost $190,000 but result in smaller operating costs. Estimated annual operating costs are as follows: Year no upgrade upgrade 1 $-100,000 $-110,000 2 -100,000 -120,000 3 -120,000 -60,000 4 -130,000 -90,000 5 -120,000 -70,000 6 -110,000 -70,000 7 -130,000 -100,000 If X Company decides to replace the equipment, what is the payback period (in years)?
Solution
Thus 190,000+10,000 +20,000 = 220,000
Hence cost savings and cost expended are equal therefore 7 years is payback period
| Year | no upgrade | upgrade | savings in cost |
| 1 | -100,000 | -110,000 | _10,000 |
| 2 | -100,000 | -120,000 | -20,000 |
| 3 | -120,000 | -60,000 | 60,000 |
| 4 | -130,000 | -90,000 | 40,000 |
| 5 | -120,000 | -70,000 | 50,000 |
| 6 | -110,000 | -70,000 | 40,000 |
| 7 | -130,000 | -100,000 | 30,000 |
| Total | 220,000 |
