A New Manufacturing Machine Is Expected to Cost $278,000, Have

question 3

Multiple Choice

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

• A) 7.3 years.
• B) 8.7 years.
• C) 4.2 years.
• D) 3.8 years.
• E) 5.4 years.

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Definitions:

Salvage Value

The expected remaining valuation of an asset after its service life has ended.

Straight-Line Method

A method of allocating the cost of a tangible asset over its useful life in equal annual installments.

Net Present Value

A method used to evaluate the profitability of an investment, calculating the difference between the present value of cash inflows and outflows over a period.

Discount Rate

The interest rate used in discounted cash flow (DCF) analyses to determine the present value of future cash flows.