Question

A company is considering the purchase of a new machine for $66,000. Management predicts that the machine can produce sales of $22,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $10,400 per year including depreciation of $5,800 per year. The company's tax rate is 40%. What is the payback period for the new machine?a. 3.00 years.b. 6.73 years.c. 5.17 years.d. 11.38 years.e. 17.19 years.

Answer 1

After Tax Cashflow: $

Annual sales 22,000

Less: Annual expenses 10,400

Profit before tax 11,600

Less: Tax @ 40% 4,640

Profit after tax 6,960

Add: Depreciation 5,800

After-tax net cashflow 12,760

Payback period = Initial outlay

After-tax net cashflow

= $66,000

$12,760

= 5.17 years

Step-by-step explanation:

In this question, there is need to calculate after-tax net cashflow, which is sales minus expenses - tax plus depreciation. Tax is calculated at 40% of profit before tax. Payback period is the ratio of initial outlay to after-tax net cashflow.