A Company Is Considering Purchasing a Machine That Costs $400,000

question 131

Multiple Choice

A company is considering purchasing a machine that costs $400,000 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 $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is

• A) 8.0 years.
• B) 7.5 years.
• C) 6.5 years.
• D) 3.2 years.

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Definitions:

Common Shares

Units of ownership interest or equity in a corporation that entitle their holder to a share of the corporation's earnings and give them the right to vote.

Earnings Per Share

A financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock.

Preferred Shares

A type of ownership in a corporation that has a higher claim on assets and earnings than common stock and often pays dividends at a fixed rate.

Shareholders' Equity

The residual interest in the assets of a corporation after deducting its liabilities, representing ownership value held by stockholders.