Bark Company is considering buying a machine for $240,000 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 period on this investment is:

a. 20 years

b. 10 years

c. 8 years

d. 4 years

option (c) 8 years

Explanation:

Data provided in the question:

Cost of the machine = $240,000

Useful life = 10 years

Salvage value = 0

Net income = $6,000 each year

Now,

Using the straight-line method of depreciation

Annual depreciation = [ Cost - Salvage value ] : Useful life

= [ $240,000 - 0 ] : 10

= $24,000

Thus,

Cash flow = $6,000 + $24,000

= $30,000

Therefore,

The payback period = (Cost) : (Cash flow)

= $240,000 : $30,000

= 8 years

Hence,

the correct answer is option (c) 8 years