A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a six-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine? $\begin{array}{llr}
\text { Sales } &&\$90,000\
\text { Costs:} &\
\text { Manufacturing } &\$52,000\
\text { Depreciation on machine } &4,000\
\text {Selling and administrative expenses } &30,000&(86,000)\
\text {Income before taxes } &&\$4,000\
\text {Income tax $ (50 \%) $ } &&(2,000)\
\text {Net income } &&\$2,000

\end{array}$

A) 24 years.
B) 12 years.
C) 4 years.
D) 6 years.
E) 1 year.

Question

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a six-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine? $\begin{array}{llr}
  \text { Sales } &&\$90,000\
 \text {  Costs:} &\
 \text { Manufacturing } &\$52,000\
 \text { Depreciation on machine } &4,000\
 \text {Selling and administrative expenses  } &30,000&(86,000)\
 \text {Income before taxes  } &&\$4,000\
 \text {Income tax \( (50 \%) $  } &&(2,000)\
 \text {Net income  } &&\$2,000

\end{array}\)

A) 24 years.
B) 12 years.
C) 4 years.
D) 6 years.
E) 1 year.

Quizplus · Accepted Answer

To find the payback period, we need to find how long it will take for the net cash inflow to recover the initial cost of the machine.

First, we need to calculate the net annual cash inflow. The projected income statement shows that the machine will generate a profit of $21,000 each year ($60,000 in revenues minus $24,000 in expenses). However, we need to adjust this amount for depreciation expense, which is $4,000 per year ($24,000 divided by 6 years). This gives us a net annual cash inflow of $17,000 per year.

Next, we divide the initial cost of the machine ($24,000) by the net annual cash inflow ($17,000) to find the payback period:

Payback period = $24,000 / $17,000 = 1.41 years or approximately 4 years.

Therefore, the best choice is C) 4 years as it represents the time required to recover the initial investment.

A Company Is Planning to Purchase a Machine That Will