Question

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 each year for the next 5 years.Expenses are expected to include direct materials,direct labor,and factory overhead (excluding depreciation)totaling $80,000 per year.The firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year. )
A) 2.5 years.
B) 2.7 years.
C) 3.1 years.
D) 3.6 years.
E) 4.2 years.

Answer 1

Answer:

c

Explanation:

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

Cash flow = profit after tax + depreciation

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

(300,000 - 0) / 5 = $60,000

Profit after tax = (1 - tax rate) x (sales - expenses - depreciation)

0.6 x ($200,000 - $80,000 - $60,000) = $36,000

Cash flow = $36,000 + 60,000 = 96,000

Payback period = $300,000 / $96,000 = 3.1 years