A company is planning to purchase a machine that will cost 5

A company is planning to purchase a machine that will cost $57000 with a sik-year life and no salvage value. The com expects to sell asset\'s life appears below. What is the payback period for this machine? pany the machine\'s output of 3,000 units evenly throughout each year. A projected income statement for each year of the Sales Costs: Manufacturing Depreciation on machine Selling and administrative expenses Income before taxes Income tax (35%) Net income 147,000 $71,000 9,500 52,000 (132,500) 14,500 (5,075) $ 9,425

Solution

Net cash flows each year

= Net Income + Depreciation

= $9,425 + $9,500

= $ 18,925

Depreciation is a non cash expense and is added to calculate the actual cash generated by the equipment so that this value can be used to calculate the payback period

So, Payback period

= Initial Investment / Annual cash inflows

= $57,000 / $18,925

= 3.01 years

So, as per above calculations, option B is the correct option