Adria Lopez is considering the purchase of equipment for Suc

Adria Lopez is considering the purchase of equipment for Success Systems that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $364,000 and to have a seven-year life and no salvage value. It will be depreciated on a straight-line basis. Success Systems expects to sell 100 units of the equipment’s product each year. The expected annual income related to this equipment follows. Sales $ 376,000 Costs Materials, labor, and overhead (except depreciation) 200,000 Depreciation on new equipment 52,000 Selling and administrative expenses 33,000 Total costs and expenses 285,000 Pretax income 91,000 Income taxes (35%) 31,850 Net income $ 59,150 Required: (1) Compute the payback period.

Solution

cost of machine 364000 Year net income dep net income after tax before depreciation 1 91000 52000 143000 2 91000 52000 143000 3 91000 52000 143000 4 91000 52000 143000 5 91000 52000 143000 6 91000 52000 143000 7 91000 52000 143000 Pay back period initial investment/annual cash flow 364000 annual cash flow 143000 Payback period 2.545455 Years