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 six years.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. Here, the annual cash inflow is $16,000 (sales) - $8,000 (expenses) = $8,000. The initial investment is $48,000. Therefore, the payback period is $48,000 / $8,000 = 6 years.

A Company Is Considering the Purchase of a New Machine