Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.

What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year.)
A) 2.5 years.
B) 2.7 years.
C) 3.1 years.
D) 3.6 years.
E) 4.2 years.

Question

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.

What is the payback period for the new machine (rounded to nearest one-tenth of a year) ? (Assume that the cash inflows occur evenly throughout the year.)

What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year.)
A) 2.5 years.
B) 2.7 years.
C) 3.1 years.
D) 3.6 years.
E) 4.2 years.

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. The annual net cash inflow is the sales minus expenses and taxes. The annual cash inflow is $200,000 - $80,000 = $120,000. Depreciation is $300,000/5 = $60,000. Tax savings from depreciation is $60,000 * 40% = $24,000. Net cash inflow after tax is $120,000 - ($120,000 - $60,000) * 40% + $24,000 = $96,000. Payback period = $300,000 / $96,000 = 3.125 years, rounded to 3.1 years.

Pique Corporation Wants to Purchase a New Machine for $300,000