Nuff Folding Box Company, Inc. is considering purchasing a new glueing machine. The glueing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated using the Class 10 CCA rate of 30% and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by
$17,000 per year. The new machine will be depreciated using the Class 10 CCA rate of 30%. The firm has a 12 percent cost of
capital and a 40 percent tax on ordinary income and capital gains.
-The payback period for the project is (See Figure 12.7)
A) 2 years.
B) between 3 and 4 years.
C) 3 years.
D) between 4 and 5 years.

Question

Quizplus · Accepted Answer

The payback period is between 3 and 4 years because the annual savings from reduced operating costs ($17,000) will offset the net initial investment (considering the cost of the new machine, installation, and the sale of the old machine) in a period between 3 and 4 years.