Answer (B) is correct . Payback is the number of years required to complete the return of the original investment. Given a periodic constant cash flow, the payback period equals net investment divided by the constant expected periodic after-tax cash flow. The desired payback period is 4 years, so the constant after-tax annual cash flow must be $90,000 ($360,000 ÷ 4). Assuming that the company has sufficient other income to permit realization of the full tax savings, depreciation of the machine will shield $60,000 ($360,000 ÷ 6) of income from taxation each year, an after-tax cash savings of $24,000 ($60,000 × 40%). Thus, the machine must generate an additional $66,000 ($90,000 – $24,000) of after- tax cash savings from operations. This amount is equivalent to $110,000 [$66,000 ÷ (1.0 – .4)] of before-tax operating cash savings.
Answer (A) is incorrect because The amount of $90,000 is the total desired annual after-tax cash savings.
Answer (C) is incorrect because The amount of $114,000 results from adding, not subtracting, the $24,000 of tax depreciation savings to determine the minimum annual after-tax operating savings.
Answer (D) is incorrect because The amount of $150,000 assumes that depreciation is not tax deductible.
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