A company is considering the purchase of a new machine for $66,000. Management predicts that the machine can produce sales of $22,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $10,400 per year including depreciation of $5,800 per year. The company's tax rate is 40%. What is the payback period for the new machine? a. 3.00 years. b. 6.73 years. c. 5.17 years. d. 11.38 years. e. 17.19 years.

Question

Business

Jace Beck

17 June, 12:10

A company is considering the purchase of a new machine for $66,000. Management predicts that the machine can produce sales of $22,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $10,400 per year including depreciation of $5,800 per year. The company's tax rate is 40%. What is the payback period for the new machine? a. 3.00 years. b. 6.73 years. c. 5.17 years. d. 11.38 years. e. 17.19 years.

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Answers (1)

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Guadalupe Erickson · Answer 1

After Tax Cashflow: $

Annual sales 22,000

Less: Annual expenses 10,400

Profit before tax 11,600

Less: Tax @ 40% 4,640

Profit after tax 6,960

Add: Depreciation 5,800

After-tax net cashflow 12,760

Payback period = Initial outlay

After-tax net cashflow

= $66,000

$12,760

= 5.17 years

Explanation:

In this question, there is need to calculate after-tax net cashflow, which is sales minus expenses - tax plus depreciation. Tax is calculated at 40% of profit before tax. Payback period is the ratio of initial outlay to after-tax net cashflow.