Sinclair is considering the acquisition of new machinery that will produce uniform benefits over the next eight years. The following information is available:
Annual savings in cash operating costs: $350,000
Annual depreciation expense: $250,000
If the company is subject to a 30% tax rate, what denominator should be used to compute the machinery's payback period?

Question

Quizplus · Accepted Answer

The payback period is calculated using the after-tax cash savings. The annual savings in cash operating costs is $350,000. The tax shield from depreciation is $250,000 * 30% = $75,000. The after-tax cash savings is $350,000 - ($350,000 * 30%) + $75,000 = $320,000.

Sinclair Is Considering the Acquisition of New Machinery That Will