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A company is considering the purchase of a new machine for $65,000. Management predicts that the machine can produce sales of $21,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $9,600 per year including depreciation of $5,700 per year. Income tax expense is $4,560 per year based on a tax rate of 40%. What is the payback period for the new machine

Answer :

Answer:

Payback period = 5 years 2.23 months

Explanation:

Provided information,

Cash outflow = $65,000

Cash inflow for each period = Revenue - Cash cost that is net of depreciation - taxes.

= $21,000 - ($9,600 - $5,700) - $4,560

= $12,540

Therefore, if simple payback period is to be calculated then

[tex]\frac{65,000}{12,540} = 5.183[/tex]

That means 5 years and [tex]0.183 \times 365 = 66.795 = 66.795/30 = 2.23 months[/tex]

Simple payback period without any discount rate = 5 years 2.23 months.

Since discount rate not provided it is ignored.

Payback period = 5 years 2.23 months

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