Case Math · Interview Question
A new machine costs $500K and saves $125K per year. Simple payback and rough ROI?
How to answer
Payback = investment / annual savings = $500K / $125K = 4 years. Simple annual ROI = $125K / $500K = 25% per year. I'd flag that payback ignores the time value of money and anything beyond year 4, so for a longer-lived asset I'd want an NPV view too.
Key idea: Confusing payback period (years) with ROI (a percentage), or quoting a payback period as if it were a return.
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