A company is planning to purchase a machine that will cost $24,000, have a six-y

Question

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine?

24 years.

12 years.

6 years.

4 years.

1 year.

Sales $90,000 Costs: Manufacturing $52,000 Depreciation on machine 4,000 Selling and administrative expenses 30,000 (86,000) Income before taxes $4,000 Income tax (50%)   (2,000) Net income $2,000

Explanation / Answer

Cash Flow by the project = Net Income + Depreciation

= $2000 + $4000

= $6000

Cost of the Machine = $24000

the payback period for this machine = Cost of Machine / Cash Flow per year

= $ 24000 / $ 6000 = 4 years

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