A company is considering the purchase of a new machine for $72,000.Management predicts that the machine can produce sales of $21,000 each year for the next eight years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $5,000 per year plus depreciation of $9,000 per year.The company's tax rate is 40%.What is the payback period for the new machine?
A) 5.45 years
B) 17.14 years
C) 10.29 years
D) 4.50 years
E) 6.00 years

Question

Quizplus · Accepted Answer

$21,000 - $5,000 - $9,000 = $7,000 pretax net income -
.6($7,000) = $4,200 (net income) + $9,000 (noncash depreciation) = $13,200 annual cash inflow
Payback period = $72,000/$13,200 = 5.45 years

A Company Is Considering the Purchase of a New Machine