A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is 12 years.

Question

Quizplus · Accepted Answer

The payback period for the machine is actually 4 years, not 12. To calculate payback period, divide the initial cost ($24,000) by the net cash flows per year ($6,000), which gives 4 years. Therefore, the statement is false.

A Company Is Planning to Purchase a Machine That Will