A company is planning to purchase a machine that will cost $32,400, have a six-y

Question

A company is planning to purchase a machine that will cost $32,400, 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?

1.25 years.

6.00 years.

3.17 years.

3.75 year.

1.59 years.

  Sales $132,000      Cost:   Manufacturing $53,400      Depreciation on machine 5,400      Selling and administrative expenses 44,000    (102,800)   Income before taxes $29,200      Income tax (30%) (8,760)   Net income $20,440   

Explanation / Answer

Answer:

payback period=1.25 year

Working notes for the above answer is as under

Payback Period

= Initial Investment/Annual Cash Inflow

Annual Cash Inflow

= Net Income + Depreciation

= 20440 + 5400

= 25840

Payback Period

= Initial Investment/Annual Cash Inflow

= 32400/25840

= 1.25 Years

Payback period =1.25 year

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