Question

A company is considering purchasing a machine that costs $520000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $210000 and annual operating expenses exclusive of depreciation expense are expected to be $40000. The straight-line method of depreciation would be used. The cash payback period on the machine is

8.0 years.

4.1 years.

3.1 years.

2.0 years.

Answer 1

The cash payback period on the machine is?

Answer: 3.1 years

Working

Formula for calculating payback period when cash flows are equal is as follows;

Payback period = Initial investment ÷ Net annual cash flow

Where,

Initial investment = $520,000

Net annual cash flow            = annual revenues - annual operating expenses

                                    = $210,000 - $40,000

                                    =$ 170,000

Payback period calculation

Payback period = Initial investment ÷ Net annual cash flow

                                    = $520,000 ÷ $170,000

                                    = 3.0588

                                    =3.1 years