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? Sales $90,000 Cost: Manufacturing $52,000 Depreciation on machine 4,000 Selling and administrative expenses 30,000 (86,000) Income before taxes $4,000 Income tax (40%) (1,600) Net income $2,400 20.00 years. 3.75 years. 1.25 year. 6.00 years. 10.00 years.

Explanation / Answer

B. 3.75 years

Annual cash Fows = $2,400 + $4,000 = $6,400

Payback period = $24,000/$6,400 = 3.75 years

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