Question

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.

Answer 1

Answer:

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.