Question

A company is considering the purchase of a new machine for $55,000. Management predicts that the machine can produce sales of $16,700 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $7,300 per year including depreciation of $4,700 per year. Income tax expense is $3,760 per year based on a tax rate of 40%. What is the payback period for the new machine

Answer 1

Answer:

5.32 years

Explanation:

Particulars                 Amount

Sales                           $16,700  

Less: Expenses          $7,300

Profit before tax         $9,400  

Less: income tax        $3,760

Net income                 $5,640

Add: Depreciation      $4,700

Annual Cash flow      $10,340

So, the payback period for the new machine = Total investment/Annual cash flow = $55,000 / $10,340 = 5.319148936170213 = 5.32 years