A company is planning to purchase a machine that will cost $132,000, have a six-
ID: 2592199 • Letter: A
Question
A company is planning to purchase a machine that will cost $132,000, have a six-year life, and be depreciated using the straight-line method 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.
57,000
(158,000)
( 20,000)
$ 20,000
6.60 years
3.30 years
13.20 years
3.14 years
1.00 year
A company is planning to purchase a machine that will cost $132,000, have a six-year life, and be depreciated using the straight-line method 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.
Explanation / Answer
Cost = $132,000 , Life = 6 years , Salvage Value = NIL , Net Income = $20,000
Depreciation = 132,000 / 6 = $22,000
Annual Cashflows = Net Income + Depreciation = (20,000 + 22,000 ) = $42,000
Payback period = Initial Investment / Annual cashflows = 132,000 / 42,000 = 3.14 years. (d)
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