Question

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is the payback period for the new machine

Answer 1

6 years

Step-by-step explanation:

Payback period is the length of time required for the total cashflows to equal the initial capital investment.

Note : Payback method uses cashflows not profits

Determination of Annual Cash flow :

After-tax net income $2,000

Add depreciation $1,500

Annual cash flow $3,500

Therefore,

Payback period = $3,500 + $3,500 + $3,500 + $3,500 + $3,500 + $3,500+ $3,500

= $21,000

Therefore, the payback period is 6 years