Question

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The payback period for the machine is 12 years.

a. True
b. False

Answer 1

It is false that the payback period for the machine is 12 years.

Step-by-step explanation:

As the formula for the backpack period is as follow:

Payback period = Initial Cost / Net cash inflow

where Payback period is in years.

In our case:

Initial cost of machine = $24,000

Net cash inflow = $6,000

Putting the values in the above formula, we get

Payback period = 24,000/6,000

Payback period = 4 Years

So, the payback period is not 12 years.