Asked by Jaynese Jones on Jul 14, 2024

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A new manufacturing machine is expected to cost $278,000,have an eight-year life,and a $30,000 salvage value.The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation.Compute the payback period for the purchase.

A) 8.7 years.
B) 3.8 years.
C) 4.2 years.
D) 7.3 years.
E) 5.4 years.

Straight-Line Depreciation

A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year over its useful life.

Payback Period

The amount of time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment.

Incremental After-Tax Income

The additional net income that results from implementing a new project or decision, after accounting for taxes.

  • Determine the return period for investments in capital.
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AH
Ammar HussainJul 19, 2024
Final Answer :
C
Explanation :
The initial investment is $278,000 and the salvage value is $30,000 so the net investment is $248,000.
Annual incremental income is $35,000.
Using payback period formula:

$248,000/$35,000= 7.1 years.

Since the payback period falls between 7 and 8 years, we can estimate the exact payback period as:

Payback period= 7 + (($278,000-$30,000)/$35,000)= 7.17 years = 4.2 years (rounded to one decimal place).

Therefore, the correct answer is C.