A Company Is Considering Purchasing a Machine for $21,000

question 100

Multiple Choice

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is the payback period for the new machine?

• A) 6 years.
• B) 4 years.
• C) 10.5 years.
• D) 14 years.
• E) 42 years.

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Definitions:

Margin Of Safety

A financial ratio that measures the difference between actual sales and the break-even point, indicating the cushion a company has before incurring a loss.

Break-Even Sales

The point at which total revenues equal total costs, resulting in zero profit.

Operating Leverage

A financial metric that measures the degree to which a firm or project can increase operating income by increasing revenue.

Net Operating Income

A company's revenue minus its operating expenses, excluding taxes and interest, indicating the profitability of its core business activities.