A company is planning to purchase a machine that will cost $54,000 with a six-ye

Question

A company is planning to purchase a machine that will cost $54,000 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 $ 120,000 Costs: Manufacturing $ 62,000 Depreciation on machine 9,000 Selling and administrative expenses 40,000 (111,000 ) Income before taxes $ 9,000 Income tax (35%) (3,150 ) Net income $ 5,850

Explanation / Answer

ans) Pay back period = Initial investment / Annual cash inflow

Annual cash inflow = Net income + Non cash expense (Depreciation)

= 5850 + 9000

= 14850

Pay Back period = 54000 / 14850 = 3.63 Years

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