Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback on this investment is
A) 15 years.
B) 10 years.
C) 6 years.
D) 3 years.

Question

Quizplus · Accepted Answer

The cash payback period is calculated by dividing the initial investment by the annual cash inflow. The annual cash inflow is the net income plus depreciation. Depreciation is $9,000 per year ($90,000/10 years). Therefore, the annual cash inflow is $6,000 (net income) + $9,000 (depreciation) = $15,000. The payback period is $90,000 / $15,000 = 6 years.

Nance Company Is Considering Buying a Machine for $90,000 with an Estimated