A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a three-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?

Question

Quizplus · Accepted Answer

The payback period is the length of time it takes for the company to recover its initial investment in the machine. To calculate the payback period, we need to determine how many units need to be sold each year to recoup the cost of the machine.

Total cost of the machine = $24,000
Depreciation per year = $24,000 / 3 = $8,000
Annual production = 3,000 units

Year 1
Sales revenue = 3,000 units x $10 per unit = $30,000 
Cost of goods sold = $18,000 ($8,000 in depreciation + $10,000 in other costs)
Net income = $12,000 ($30,000 - $18,000)

Year 2
Sales revenue = $30,000
Cost of goods sold = $18,000
Net income = $12,000

Year 3
Sales revenue = $30,000
Cost of goods sold = $18,000
Net income = $12,000

Year 4
Sales revenue = $30,000
Cost of goods sold = $12,000 ($8,000 in depreciation + $4,000 in other costs)
Net income = $18,000 ($30,000 - $12,000)

Based on these projections, the company will recoup its initial investment in the machine in Year 4. Therefore, the payback period is 4 years.

A Company Is Planning to Purchase a Machine That Will