Question

A company is considering the purchase of a new machine for $65,000. Management predicts that the machine can produce sales of $21,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $9,600 per year including depreciation of $5,700 per year. Income tax expense is $4,560 per year based on a tax rate of 40%. What is the payback period for the new machine

Answer 1

Payback period = 5 years 2.23 months

Step-by-step explanation:

Provided information,

Cash outflow = $65,000

Cash inflow for each period = Revenue - Cash cost that is net of depreciation - taxes.

= $21,000 - ($9,600 - $5,700) - $4,560

= $12,540

Therefore, if simple payback period is to be calculated then

`(65,000)/(12,540) = 5.183`

That means 5 years and
`0.183 * 365 = 66.795 = 66.795/30 = 2.23 months`

Simple payback period without any discount rate = 5 years 2.23 months.

Since discount rate not provided it is ignored.

Payback period = 5 years 2.23 months