Answer:
The payback period for the new machine is 3.5 years.
Explanation:
Pay Back Period: The pay back period shows that period in which the borrower has to repay the borrowed amount taken by the financial institution.
In Mathematically,
Payback Period = Initial Investment ÷ Annual cash inflows
where initials investment is $350,000 given
And, the annual cash flows is to computed which is shown below:
= Sales - all expenses - Depreciation - tax rate + depreciation
where,
Sales - all expenses - Depreciation = Net income before tax
Net income before tax - tax rate = Net income after tax
Net income after tax + depreciation = Annual cash inflows
And Depreciation = (Purchase cost - Residual value) ÷ Useful life
So,
Depreciation = $350,000 ÷ 5 = $ 70,000
$205,000 - $85,000 - $70,000 = Net income before tax = $50,000
$40,000 - 35% = Net income after tax = $32,500
$32500 + $ 70,000 = Annual cash inflows = $102,500
Since the depreciation is non cash expense, so it is added back.
Now Payback period = Initial Investment ÷ Annual cash inflows
= $350,000 ÷ $102,500
= 3.5 years.
Thus, the payback period for the new machine is 3.5 years.
