Asked by Jaynese Jones on Jul 14, 2024
Verified
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.
Verified Answer
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.
Learning Objectives
- Determine the return period for investments in capital.
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