Question

A company is planning to purchase a machine that will cost $54,000 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?

Answer 1

Answer: 3.63 years.

Explanation:

The Payback period of a machine refers to how long it will take to repay it's initial investment. In this case, how long it will take to repay $54,000.

The Net Income is given in the income statement. The Depreciation needs to be added back to this income though because it is a non-cash expense so failing to add it back understates the actual amount of money that the company is getting from the machine.

Total Annual Payback = Net Income + Depreciation

= 5,850 + 9,000

= $14,850

Payback Period is,

= Initial Cost / Annual Inflow

= 54,000 / 14,850

= 3.63 years