Webster Corporation is considering producing a new automobile product, Glisten. Research has determined that the company will be able to sell 50,000 units per year at $13. The product will be produced in a section of an existing factory that is currently not in use. To produce Glisten, Webster must buy a machine that costs $380,000. The machine has an expected life of five years and will have an ending residual value of $40,000. Webster will depreciate the machine over five years using the straight-line method. In addition to the cost of the machine, the company will incur incremental manufacturing costs of $535,000. Webster has an income tax rate of 30 percent, and the company's required rate of return is 7 percent. Calculate the payback period.

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. In this case, the initial investment is $380,000. The annual cash flow is $50,000 x $13 = $650,000. The payback period is therefore $380,000 / $650,000 = 3.8 years.

Webster Corporation Is Considering Producing a New Automobile Product, Glisten