A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

Question

Quizplus · Accepted Answer

To calculate payback period, we need to determine how many years it takes to recover the initial investment:

Initial Investment = Cost - Salvage Value = $278,000 - $30,000 = $248,000

Annual Incremental Cash Flows = $35,000

Payback Period = Initial Investment / Annual Incremental Cash Flows = $248,000 / $35,000 = 7.09 years, or approximately 7.1 years.

Therefore, the answer is C) 4.2 years.

A New Manufacturing Machine Is Expected to Cost $278,000, Have