Reference: 24_02
a Company Is Planning to Purchase a Machine

question 13

Multiple Choice

Reference: 24_02
A company is planning to purchase a machine that will cost $35,000, have a seven-year life, and be depreciated using the straight-line method with no salvage value. The company expects to sell the machine's output of 4,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below:
$\begin{array}{llr}\text{Sales} & & \$ 119,000\\\text{Costs:} & & \\\text{Manufacturing} & \$ 68,000 \\ \text{Depreciation on machine} & 5,000 \\ \text{Selling and administrative expenses} & 40,000 & \underline{(113,000) }\\\text{Income before taxes} & & \$ 6,000 \\\text{Income tax \(50 \%\) } & & \underline{(3,000) }\\\text{Net income} & & \bold{\underline{\$ 3,000}}\end{array}$
-What is the payback period for this machine?

• A) 17.50 years
• B) 11.67 years
• C) 5.00 years
• D) 4.375 years
• E) 1 year

---

Definitions:

Cash

Currency and coins, along with funds in bank accounts and other forms of immediately available funds.

Accounting Equation

The foundation of double-entry bookkeeping, stating that assets are equal to the sum of liabilities and owner's equity: Assets = Liabilities + Owner's Equity.

Owner's Equity

The residual interest in the assets of the entity after deducting liabilities, representing what the owners or shareholders own outright in the company.

Liabilities

Financial obligations a company owes to outside parties.