Sandy's Soda Co. is planning to purchase new equipment that costs $56,000 and will save on operating costs for the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5. The payback period for the cooling equipment is years.

It will take 2.6 years to cover the initial investment.

Explanation:

Giving the following information:

Initial investment= $56,000

Cash flows:

Cf1= $21,500

Cf2= 23,100

Cf3= $19,000

The payback period is the time required to cover the initial investment.

Year 1= 21,500 - 56,000= -34,500

Year 2= 23,100 - 34,500= -11,400

Year 3= 19,000 - 11,400= $7,600

To be more accurate:

(11,400/19,000)= 0.6

It will take 2.6 years to cover the initial investment.

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