Question

A company is considering purchasing a machine that costs $240000 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 $70000 and annual operating expenses exclusive of depreciation expense are expected to be $32000. The straight-line method of depreciation would be used. The cash payback period on the machine is

7.3 years.

6.3 years.

3.6 years.

Answer 1

Cash payback period on the machine would be -

= Cost of machine /Annual Net income

Annual net income =

Annual revenues - annual operating expense

Annual net income =

= $70000 - $32000

= $ 38000

Cash payback period =

$240000 / $38000

= 6.3 years.

Note -

Since ,depriciation is a non cash expense, it is always added back to the net income. But since, in this question, it is given that depriciation is not considered, so there is no need to add back any depriciation.

Therefore, the correct answer is option 2nd, 6.3 years.