Q26) A company is considering the purchase of a new machine for $67,000. Managem

Question

Q26)

A company is considering the purchase of a new machine for $67,000. Management predicts that the machine can produce sales of $20,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,200 per year including depreciation of $5,900 per year. The company's tax rate is 40%. What is the payback period for the new machine?

3.35 years.

6.77 years.

5.16 years.

11.36 years.

26.59 years.

A company is considering the purchase of a new machine for $67,000. Management predicts that the machine can produce sales of $20,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,200 per year including depreciation of $5,900 per year. The company's tax rate is 40%. What is the payback period for the new machine?

Explanation / Answer

Annual Cash Flows = Sales - Expenses = Tax + Depreciation

Sales $20000

Less Expenses $8200

Profit Before Tax $11800

Less Tax @ 40% $4720

Profit After Tax $7080

+ Depreciation $5900

Annual Cash Flows $12980

Payback Period = Initial Investment / Annual Cash Flows

= $67000 / $12980

= 5.16 years

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