Goodman Woodworks has recently purchased a new saw costing $14,000. Because of a revolutionary new cutting blade, the new saw will not cause the veneer to splinter and will make clean cuts. This will save the firm $1,200 each year, which goes in wastage. Calculate the payback period for the $14,000 investment.

Payback period is 11.67 years

Explanation:

Payback period is the time period in which initial investment of the asset recovered from it benefit. Saw cutting machine was purchased for $14,000 which is the initial investment. It will save $1,200 per year which is the benefit.

As the cash flows are constant use following formula to calculate payback period

Payback period = Initial cost / Benefit per year

Payback period = $14,000 / $1,200

Payback period = 11.67 years