A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000. The straight-line method of depreciation would be used. The cash payback period on the machine is

Question

Quizplus · Accepted Answer

The cash payback period is calculated by dividing the initial investment by the annual net cash inflow. The annual net cash inflow is the annual revenue minus the annual operating expenses. Here, it is $100,000 - $25,000 = $75,000. The cash payback period is $400,000 / $75,000 = 5.33 years. However, since the question asks for the payback period considering depreciation, the correct calculation should consider the net income after depreciation, which is $75,000 - ($400,000/8) = $25,000. Therefore, the payback period is $400,000 / $25,000 = 16 years, but since this is not an option, the closest correct choice considering only cash flows is 6.5 years.

A Company Is Considering Purchasing a Machine That Costs $400,000