Question

A company is planning to purchase a machine that will cost $57,000 with a six-year life and no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine?

Sales $138,000
Costs:
Manufacturing $68,000
Depreciation on machine 9,500
Selling and administrative expenses 46,000 (123,500)
Income before taxes $14,500
Income tax (35%) 5,075
Net income $9,425
a. 6.00 years.
b. 1.99 year.
c. 6.05 years.
d. 12.10 years.
e. 3.01 years.

Answer 1

e. 3.01 years

Step-by-step explanation:

Cost of Asset = $57,000

Net annual cash Inflow = Net Income after Tax + Depreciation

Net annual cash Inflow = $9,425 + $9,500

Net annual cash Inflow = $18,925

Payback Period = Cost of Asset (Investment) / Net annual cash Inflow

Payback Period = $57,000 / $18,925

Payback Period = 3.01188904

Payback Period = 3.01 years