A company is planning to purchase a machine that will cost $155,000, have a seven-year life, and...
Question:
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:
| Sales | $212,000 | |
| Costs: | ||
| Manufacturing | $98,000 | |
| Depreciation on machine | $25,000 | |
| Selling and administrative expenses | $70,000 | $(193,000) |
| Income before taxes | $19,000 | |
| Income tax (50%) | $(9,500) | |
| Net income | $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
Payback Period:
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
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View this answerThe 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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