A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is the payback period for the new machine?
A) 6 years.
B) 4 years.
C) 10.5 years.
D) 14 years.
E) 42 years.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. The annual cash inflow is the net income plus depreciation ($2,000 + $1,500 = $3,500). The payback period is $21,000 / $3,500 = 6 years.

A Company Is Considering Purchasing a Machine for $21,000