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 tax rate is 40%.Management requires a minimum 10% rate of return 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. )

Question

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 depreciation is $60,000 ($300,000/5 years). The taxable income is $60,000 ($200,000 - $80,000 - $60,000), and the tax is $24,000 (40% of $60,000). The net income is $36,000 ($60,000 - $24,000), and the cash inflow is $96,000 ($36,000 + $60,000 depreciation). The payback period is $300,000 / $96,000 = 3.125 years, rounded to 3.1 years.

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