Question

Bark Company is considering buying a machine for $240,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback period on this investment is:
a. 20 years
b. 10 years
c. 8 years
d. 4 years

Answer 1

Answer:

option (c) 8 years

Explanation:

Data provided in the question:

Cost of the machine = $240,000

Useful life = 10 years

Salvage value = 0

Net income = $6,000 each year

Now,

Using the straight-line method of depreciation

Annual depreciation = [ Cost - Salvage value ] ÷ Useful life

= [ $240,000 - 0 ] ÷ 10

= $24,000

Thus,

Cash flow = $6,000 + $24,000

= $30,000

Therefore,

The payback period = ( Cost ) ÷ ( Cash flow )

= $240,000 ÷ $30,000

= 8 years

Hence,

the correct answer is option (c) 8 years