A company is planning to purchase a machine that will cost $42,000 with a six-ye

Question

A company is planning to purchase a machine that will cost $42,000 with a six-year life and 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? Sales $ 105,000 Costs: Manufacturing $ 57,000 Depreciation on machine 7,000 Selling and administrative expenses 35,000 (99,000 ) Income before taxes $ 6,000 Income tax (30%) (1,800 ) Net income $ 4,200

Explanation / Answer

Cash inflow = 4200+7000 = 11200

payback period - 42000/11200

= 3.75 years

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