Omaha Plating Corporation is considering purchasing a machine for $1,500,000.The machine will generate a constant after-tax income of $100,000 per year for 15 years.The firm will use straight-line (SL)depreciation for the new machine over 10 years with no residual value.
What is the payback period for the new machine,under the assumption that cash inflows occur evenly throughout the year?

Question

Quizplus · Accepted Answer

In order to calculate the payback period, we need to divide the initial cost of the machine ($1,500,000) by the annual cash inflows ($100,000).

Payback period = $1,500,000 ÷ $100,000 = 15 years

However, since the machine will generate cash inflows evenly throughout the year, we need to divide the initial cost by half of the annual cash inflows ($50,000) to get a more accurate payback period.

Payback period = $1,500,000 ÷ $50,000 = 30 years

Since the payback period exceeds the expected life of the machine (15 years), the investment is not advisable. Therefore, the best choice is not to purchase the machine.

Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000