A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is
A) 8.0 years.
B) 7.5 years.
C) 6.5 years.
D) 3.2 years.

Question

Quizplus · Accepted Answer

The cash payback period is calculated by dividing the initial investment by the annual net cash inflow. The annual net cash inflow is the annual revenue minus the annual operating expenses, which is $100,000 - $38,000 = $62,000. The cash payback period is $400,000 / $62,000 = 6.45 years, which rounds to 6.5 years.

A Company Is Considering Purchasing a Machine That Costs $400,000