A company is considering the purchase of a new machine for $44,800. Management predicts that the...
Question:
A company is considering the purchase of a new machine for $44,800.
Management predicts that the machine can produce sales of $28,000 each year for the next 10 years.
Expenses are expected to include direct materials, direct labor, and factory overhead totaling $14,400 per year plus depreciation of $7,200 per year.
The company's tax rate is 40%.
What is the payback period for the new machine?
a) 11.7 years
b) 4.1 years
c) 3.1 years
d) 1.6 years
e) 6.2 years
Determining the Payback Period of a Given Investment:
A firm may use any one of the several techniques available for evaluating a budget proposal viz. net present value, payback period, accounting rate of return, profitability index, internal rate of return etc. The payback period is the period over which the entire initial investment gets recovered.
Answer and Explanation: 1
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View this answerThe calculated payback period for the new machine is option b) 4.1 years
Here, annual net income for the next 10 years
= (Expected annual sales -...
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How to Calculate Payback Period: Method & Formula
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