Problem:
Territories Cable, Inc. is considering purchasing new data transmission equipment. Estimated annual cash revenues for the new equipment are $1 million, and operating costs (including depreciation of $400,000) are $825,000. The equipment costs $2 million, it has a 5 year life, and it will have no residual value at the end of the five years.
Required:
Question 1: Compute the payback period for the piece of equipment. (Round to one decimal place.) Does this method yield a positive or a negative response to the proposal to buy the equipment if the company has set a maximum payback period of 4 years? Explain your answer.
Note: Provide support for your rationale.