Pro-Mate, Inc. is a producer of athletic equipment. The company is considering t

Question

Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase of a machine to produce baseball bats. The machine will cost $60,000 and have a 10-year useful life. The following annual revenues and expenses are projected:

The machine will have no salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period for the new machine is about:

6.0 years

1.5 years

5.4 years

3.75 years

Sales $40,000 Less expenses:   Out-of-pocket production costs $15,000   Selling expenses 9,000   Depreciation   6,000 30,000 Net operating income $10,000

Explanation / Answer

Year

Operating income before tax

Cumulative cashflow

1

16000

16000

2

16000

32000

3

16000

48000

4

16000

64000

5

16000

80000

6

16000

96000

7

16000

112000

8

16000

128000

9

16000

144000

10

16000

160000

Payback period = 3+((60000-48000)/(64000-48000))

                          = 3.75 years

Year

Operating income before tax

Cumulative cashflow

1

16000

16000

2

16000

32000

3

16000

48000

4

16000

64000

5

16000

80000

6

16000

96000

7

16000

112000

8

16000

128000

9

16000

144000

10

16000

160000

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