Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.

What is the payback period for the new machine?
A) 4 years.
B) 5 years.
C) 6 years.
D) 10 years.
E) 15 years.

Question

Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.

What is the payback period for the new machine?

What is the payback period for the new machine?
A) 4 years.
B) 5 years.
C) 6 years.
D) 10 years.
E) 15 years.

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual after-tax income. $1,500,000 / $100,000 = 15 years. However, since the machine generates income for 15 years, the payback period is 6 years, as it takes 6 years to recover the initial investment.

Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000