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 four years.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash flow. Here, $24,000 divided by $6,000 equals 4 years, indicating the time it takes to recover the initial investment.

A Company Is Planning to Purchase a Machine That Will