Question

A company is planning to purchase a machine that will cost $24,000 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 $ 90,000 Costs: Manufacturing $ 52,000 Depreciation on machine 4,000 Selling and administrative expenses 30,000 ( 86,000 ) Income before taxes $ 4,000 Income tax (50%) (2,000 ) Net income $ 2,000 Multiple Choice 24 years. 12 years. 6 years. 4 years. 1 year.

Answer 1

Answer:

The correct option is 4 years

Explanation:

Payback period is the length of time it takes an investment to repay itself.By repaying itself I meant the time horizon taken for the initial capital outlay from a project to be recovered.

Payback period=initial investment /net annual cash inflow

initial investment is the $24,000 spent in acquiring the new machine

net annual cash flow =net income+depreciation

depreciation is added because it is not a cash flow in real  sense

net annual cash flow=$2000+$4000=$6000

payback period=$24,000/$6000= 4 years