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A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct aterials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is?

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Explanation & answer:

Cash basis, so all monies retain same values over the years.

Let x = payback period in years

Salvage value of machine

= 48000 - 4000x

Sales

= 16000x

Total revenue after x years

R = 16000x

Expenditures over x years

C = Cost of machine + materials + depreciation

= 48000 + 8000x + 4000x

= 48000 + 12000x

For payback

R = C

16000x = 48000 +12000x

Solve for x

x = 48000/4000 = 12 years

By that time, the machine has no more salvage value.

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