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16 March, 21:18

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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  1. 16 March, 21:32
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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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