Question

A new manufacturing machine is expected to cost $287,000, have an eight-year life, and a $29,000...

A new manufacturing machine is expected to cost $287,000, have an eight-year life, and a $29,000 salvage value. The machine will yield an annual incremental after-tax income of $30,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

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Homework Answers

Answer #1

Calculation of Payback Period

Initial Investment/Cash Flow per Year

(287000/30000)

9.57 Years

Payback period is the number of years or duration of period in which an investor is able to recover its initial investment. Payback period is criticized on the ground that it does not consider time value of money in consideration.

In the question given, It can be seen that Payback period is more than life of the asset and will be a bad choice to accept the proposal.
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