Question

a company is considering purchasing a machine for $21,000. the machine will generate income of $2,000 per year. annual depreciation expense would be $1,500. what is the payback period for the new machine? group of answer choices 4.0 years. 6.0 years. 10.5 years. 14.0 years. 42.0 years.

Answer 1

The payback period is a measure of the length of time it takes to recoup the initial investment in a project or asset. It is calculated by dividing the initial investment by the annual cash flows generated by the asset.

Step-by-step explanation:

In this case, the initial investment is $21,000, and the annual cash flow generated by the machine is $2,000 - $1,500 = $500 (income minus depreciation).

Therefore, the payback period for the new machine would be:

$21,000 / $500 = 42

So it will take 42 years to recoup the initial investment.

Please note that the payback period is a simple measure of profitability, but it doesn't take into account the time value of money. It may be useful as a rule of thumb but is not a good measure of profitability when trying to compare projects with different lifetimes or cash flows. It is also not considering the potential future income after the payback period.