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A company is considering the purchase of a new machine for $54,000. Management predicts that the machine can produce sales of $16,600 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $7,400 per year including depreciation of $4,600 per year. The company's tax rate is 40%. What is the payback period for the new machine?

a. 6.28 years.
b. 26.47 years.
c. 11.74 years.
d. 5.34 years.
e. 3.25 years.

Respuesta :

Answer:

Payback Period = 5.34 years

so correct option is d. 5.34 years

Explanation:

given data

purchase machine = $54,000.

sales = $16,600

time = 10 year

Expenses = $7400

depreciation = $4,600 per year

tax rate = 40%

to find out

payback period for the new machine

solution

we get here earning before tax that is express as

earning before tax EBT = Sales - Expenses   .............1

put her value we get

earning before tax EBT =$16600 - $7400

EBT = $9260

so we get here Tax for 40% that is

tax for 40%  = 0.40 × $9260

tax for 40% = $3680

and

so net income = $5520

and

Cash Flow = net income + depreciation    

Cash Flow = $5520 + $4600

Cash Flow = $10120

so Payback Period will be her as

Payback Period = Investment ÷  Annual Cash Flow    ...................2

Payback Period = [tex]\frac{54000}{10120}[/tex]

Payback Period = 5.34 years

so correct option is d. 5.34 years

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