# 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 -...

See full answer below.

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Chapter 5 / Lesson 24Learn 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.

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