A company is planning to purchase a machine that will cost $54,000 with a six-ye

Question

A company is planning to purchase a machine that will cost $54,000 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 Costs: Manufacturing Depreciation on machine Selling and administrative expenses Income before taxes Income tax (40%) Net income $ 126,000 $64,000 9,000 42,000 (115,000) $ 11,000 (4,400) $ 6,600

Explanation / Answer

Payback period = Cost of Project/Average net income annually

Cost of project = 54000 $

Average net income annually = 6600 $

Payback period = 540000/6600 = 8.18 years

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