Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow: $$\begin{array} { l c }
\text { Annual sales } & \$ 88,000 \
\text { Labor costs } & ( 72,000 ) \
\text { Depreciation of equipment } & \underline { ( 6,000 ) } \
\text { Operating income } & \$ 10,000 \
\text { Income taxes } & \underline { ( 4,000 ) } \
\text { Net income } &\underline{\underline{ \$ 6,000}}
\end{array}$$ The estimated payback of the investment in the pasta equipment is:

Question

Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow: $$\begin{array} { l c } 
\text { Annual sales } & \$ 88,000 \
\text { Labor costs } & ( 72,000 ) \
\text { Depreciation of equipment } & \underline { ( 6,000 ) } \
\text { Operating income } & \$ 10,000 \
\text { Income taxes } & \underline { ( 4,000 ) } \
\text { Net income } &\underline{\underline{ \$ 6,000}}
\end{array}$$ The estimated payback of the investment in the pasta equipment is:

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. The net cash inflow is the operating income before depreciation and taxes, which is $10,000 + $6,000 = $16,000. The payback period is $48,000 / $16,000 = 3.0 years.

Boccardi Inc The Estimated Payback of the Investment in the Pasta Equipment