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?a. 4 years.b. 6 years.c. 10.5 years.d. 14 years.e. 42 years.

Answer 1

Answer:

b. 6 years.

Explanation:

The formula and the calculation of the payback period is presented below:

= Initial investment ÷ Net cash flow

where,  

Initial investment is $263,000

And, the net cash flow = After-tax net income + depreciation expenses

= $2,000 + $1,500

= $3,500

Now placed these values in the formula above, so the period would be equal to

= ($21,000) ÷ ($3,500)

= 6 years