Question

hammer corporation wants to purchase a new machine for $424,000. management predicts that the machine will produce sales of $276,000 each year for the next 5 years. expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $110,400 per year. the firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. hammer's combined income tax rate, t, is 40%. management requires a minimum of 10% return on all investments. what is the approximate present value payback period, rounded to one-tenth of a year? (note: pv $1 factors for 10% are as follows: year 1

Answer 1

The present value payback period can be calculated by determining the present value of the annual cash flows from the machine and comparing it to the initial cost.

Step-by-step explanation:

The present value payback period can be calculated by determining the present value of the annual cash flows from the machine and comparing it to the initial cost. The formula to calculate the present value payback period is:

Present Value Payback Period = Initial Cost / Annual Cash Flow (present value)

In this case, we need to calculate the present value of the annual cash flows from the machine using a 10% discount rate. Then, we divide the initial cost of $424,000 by the annual cash flow (present value) of $276,000. The approximate present value payback period will be rounded to one-tenth of a year.