Paramount Company Is Considering Purchasing New Equipment Costing $708,000 Residual Value Is Zero

question 9

Multiple Choice

Paramount Company is considering purchasing new equipment costing $708,000.The company's management has estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | r|r | } \hline \text { Year } 1 &\$ 202,000 \\\hline 2&202,000 \\\hline 3&254,000 \\\hline 4&254,000 \\\hline 5&150,000 \\\hline\end{array}$$
Residual value is zero.What is the payback period?

• A) 3.5 years
• B) 4.5 years
• C) 3.2 years
• D) 3.7 years

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Definitions:

Total Variable Costs

The sum of all costs that vary with output level, including materials, labor, and other expenses that change with production volume.

Techniques of Production

The methods and processes used by firms to produce goods and services efficiently.

Price of Output

The amount of money that a firm receives from the sale of goods and services it produces.

Price of Inputs

The cost associated with the resources used in the production of goods and services.