A company is considering the purchase of a new machine for $44,800. Management p

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?

11.7 years

4.1 years

3.1 years

1.6 years

6.2 years

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?

Explanation / Answer

Initial Investment = $ 44800

Calculation of Annual Cash inflow from year 1 to 10 :-

Sales

(-) Expenses

28000

14400

Earnings before Depreciation & Taxes

(-) Depreciation

13600

7200

Earnings before taxes

(-) Taxes @ 40%

6400

2560

Earnings after tax

(+) Depreciation

3840

7200

Payback period = Intial investment / Annual cash inflow

= 44800 / 11040

= 4.1 Years (approx)

Conclusion:- Payback period = 4.1 Years

Sales

(-) Expenses

28000

14400

Earnings before Depreciation & Taxes

(-) Depreciation

13600

7200

Earnings before taxes

(-) Taxes @ 40%

6400

2560

Earnings after tax

(+) Depreciation

3840

7200

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