Question

A company is considering the purchase of a new machine for $55,000. Management predicts that the machine can produce sales of $16,700 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $7,300 per year including depreciation of $4,700 per year. Income tax expense is $3,760 per year based on a tax rate of 40%. What is the payback period for the new machine

Answer 1

5.32 years

Step-by-step explanation:

Particulars Amount

Sales $16,700

Less: Expenses $7,300

Profit before tax $9,400

Less: income tax $3,760

Net income $5,640

Add: Depreciation $4,700

Annual Cash flow $10,340

So, the payback period for the new machine = Total investment/Annual cash flow = $55,000 / $10,340 = 5.319148936170213 = 5.32 years