Choice "C" is correct. The company paid $166,400 for the machine based on the payback data provided. The payback value (in years) is the amount of the capital investment divided by the after-tax cash flows of the project. By extension, the amount of the investment, the amount the company paid for the new machine) is the after-tax cash flow times the payback period computed as follows:
Compute after-tax cash flows |
Revenues | $ 35,000 |
Total operating expenses | (7,000) |
Noncash expenses (depreciation) | 4,000 |
Total cash flows (note, no tax rate provided) | $ 32,000 |
(Note: No tax rate is provided, so the only cash flow amount is the pretax amount which, we must assume, approximates the after-tax cash flows)
Compute investment |
Cash flows | × | Payback period | = | Investment (amount paid for new machine) |
$32,000 | × | 5.2 years | = | $166,400 |
Choices "a", "b", and "d" are incorrect based on the explanation above.
