A company is planning to purchase a machine that will cost $155,000, have a seven-year life, and be depreciated using the straight-line method with no salvage value. The company expects to sell the machine's output of 4,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below:
|Depreciation on machine||$25,000|
|Selling and administrative expenses||$70,000||$(193,000)|
|Income before taxes||$19,000|
|Income tax (50%)||$(9,500)|
What is the payback period for this machine?
a. 1.000 year
b. 8.160 years
c. 16.320 years
d. 4.493 years
e. 10.000 years
The payback period can be defined as a capital budgeting technique that finds out the total time required by a company to generate enough cash inflow that is equal to the initial cash outflow.
Answer and Explanation: 1
The correct option is 4.493 years (d).
The payback period for this machine is calculated as follows.
Income before taxes = Sales revenue -...
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fromChapter 5 / Lesson 24
Learn the meaning and purpose of the payback period method. Learn how to calculate the payback period, and understand the advantages and limitations of using this method.