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TB MC Qu. 24-89 A company is planning to purchase a machine... A company is planning...

TB MC Qu. 24-89 A company is planning to purchase a machine... A company is planning to purchase a machine that will cost $45,000 with a six-year life and 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? Sales $ 123,000 Costs: Manufacturing $ 63,000 Depreciation on machine 7,500 Selling and administrative expenses 41,000 (111,500 ) Income before taxes $ 11,500 Income tax (30%) (3,450 ) Net income $ 8,050

Multiple Choice

  • 6.00 years.

  • 2.89 years.

  • 5.59 years.

  • 11.18 years.

  • 2.11 year.

Business   Accounting   
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Answer #1

Payback period= Initial investment/ Annual cash flows after tax

As per the given question, we have initial investment in asset= $45000

Annual cash flows after tax is being calculated in question itself and it comes out to be = $8050

                       Putting values in formula, we get,

Payback period= 45000/8050

                       = 5.59 years

The correct option is 5.59 years

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