A company is planning to purchase a machine that will cost $24,000, have a 6-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 operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The payback period for the machine is 12 years.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. Here, it would be $24,000 / $6,000 = 4 years, not 12 years.

A Company Is Planning to Purchase a Machine That Will