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 8 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?

Question

Quizplus · Accepted Answer

The payback period is the number of years it takes for the initial investment to be recovered from the cash flows generated by the investment. In this case, the initial investment is $72,000. The annual cash flows are $21,000 - $5,000 - $9,000 = $7,000. Therefore, the payback period is $72,000 / $7,000 = 10.29 years.

A Company Is Considering the Purchase of a New Machine