A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

Question

Quizplus · Accepted Answer

The payback period for the machine is actually 3 years (48,000 initial investment / 16,000 annual cash inflow), not 12 years. Therefore, the statement is false.

A Company Is Considering the Purchase of a New Machine