A company is considering the purchase of a new machine for $128,000.Management predicts that the machine can produce sales of $32,000 each year for the next eight years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $7,500 per year plus depreciation of $10,800 per year.The company's tax rate is 38%.What is the payback period for the new machine?
A) 4.00 years
B) 6.63 years
C) 9.34 years
D) 15.06 years
E) 5.22 years

Question

Quizplus · Accepted Answer

$32,000 - $7,500 - $10,800 = $13,700 pretax net income -
.62($13,700) = $8,494 (net income) + $10,800 (noncash depreciation) = $19,294 annual cash inflow
Payback period = $128,000/$19,294 = 6.63 years

A Company Is Considering the Purchase of a New Machine