Bark Company is considering buying a machine for $120,000 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 $8,000 each year.The cash payback period on this investment is

Question

Quizplus · Accepted Answer

The cash payback period is calculated by dividing the initial investment by the expected annual net income. In this case, the initial investment is $120,000 and the expected annual net income is $8,000, so the cash payback period is 15 years ($120,000 divided by $8,000). Therefore, options A and B can be eliminated.

However, since the machine has an estimated life of 10 years and no salvage value, the straight-line depreciation method will result in an annual depreciation expense of $12,000 ($120,000 divided by 10 years). This means that the actual annual cash flow generated by the machine will be $20,000 ($8,000 net income plus $12,000 depreciation expense), and the cash payback period will be 6 years ($120,000 divided by $20,000). Therefore, option C is the correct answer. Option D can also be eliminated because the cash payback period is longer than 3 years.

Bark Company Is Considering Buying a Machine for $120,000 with an Estimated