Perry Enterprises purchased a new machine with a total cost of $31,600 and a useful life of 4 years. The machine will produce net cash inflows of $7600 over its useful life and has a residual value of $1510. What is the payback period for the new machine?

Question

Quizplus · Accepted Answer

To calculate payback period:

1. Determine the total cash outflow (initial cost of machine): $31,600
2. Determine the net annual cash inflow (net cash inflow per year): $7600
3. Calculate cumulative cash inflow by adding net annual cash inflow each year until it equals or exceeds the initial cost of the machine:
Year 1: $7600
Year 2: $15,200
Year 3: $22,800
Year 4: $30,400 + $1510 (residual value) = $31,910
4. The payback period is the number of years it takes to reach the cumulative cash inflow that equals or exceeds the initial cost of the machine: 4 years

Therefore, the best choice is C)4)16 years.

Perry Enterprises Purchased a New Machine with a Total Cost