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) 4 years.
B) 6 years.
C) 10.5 years.
D) 14 years.
E) 42 years.

Question

Quizplus · Accepted Answer

Payback period is the time required for the cash inflows from an investment to equal the initial investment cost.

Payback period = Initial investment cost / Annual net cash inflow

In this case, the initial investment cost is $21,000, the annual net cash inflow is $500 ($2,000 - $1,500), and the payback period can be calculated as:

Payback period = $21,000 / $500 = 42 years

Since the payback period is longer than the useful life of the machine, it is not a good investment. The company would have to wait 42 years to recover their initial investment, which is not feasible.

Therefore, the correct answer would be B: 6 years.

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