A new manufacturing machine is expected to cost $286,000, 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

Payback period is how long it takes for the initial investment to be recovered through incremental after-tax income.

Initial investment = $286,000 
Incremental after-tax income = $35,000

To find the payback period, we need to divide the initial investment by the incremental after-tax income and see how many years it takes to recover the investment:

Payback period = Initial investment / Incremental after-tax income 
Payback period = $286,000 / $35,000 
Payback period = 8.17 years

Since the salvage value of the machine is $30,000, we can subtract that from the initial investment to see how much we’ll actually need to recover:

Recoverable investment = $286,000 - $30,000 
Recoverable investment = $256,000

Now we can recalculate the payback period:

Payback period = Recoverable investment / Incremental after-tax income 
Payback period = $256,000 / $35,000 
Payback period = 7.31 years

Therefore, the answer is Option C - 4.3 years (rounded to one decimal place).

A New Manufacturing Machine Is Expected to Cost $286,000, Have