Question

Sinclair is considering the acquisition of new machinery that will produce uniform benefits over the next five years. The following information is available: Annual savings in cash operating costs:$460,000 Annual depreciation expense:$360,000 If the company is subject to a 20% tax rate, what denominator should be used to compute the machinery's payback period

Answer 1

The denominator (net annual cash flow) = $440,000

Step-by-step explanation:

The denominator (net annual cash flow)

Particular Amount

Saving in operating cost $460,000

Less: Depreciation $360,000

Net additional income $100,000

Income tax on above (20%) $20,000

Savings after tax $80,000

Add: Depreciation $360,000

Net annual cash benefit $440,000

The denominator (net annual cash flow) = $440,000