Question

Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. What is the payback period closest to? a. 2.1 years. b. 4.2 years. c. 2.3 years. d. 2.8 years.

Answer 1

The payback period for Hanley Company's machine is calculated by dividing the machine cost by the annual cash flow. The result is approximately 2.8 years, so the closest answer to the question is option (d) 2.8 years.

Step-by-step explanation:

The question is asking to calculate the payback period for Hanley Company's machine purchase. The payback period is the amount of time it takes for an investment to generate an amount of money equal to the cost of the investment. With a machine cost of $125,000 and an annual cash flow from operations of $45,000, we need to determine how many years it takes to recover the initial investment.

To calculate the payback period, we divide the cost of the machine by the annual cash flow:

$125,000 / $45,000 = 2.777...

Since the cash flows are uniform throughout the year, the payback period is approximately 2.8 years, which makes option (d) 2.8 years the closest answer.