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Bob Jensen Inc. purchased a $650,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. Jensen uses a 10% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows:
Data
Purchase price of machine $650,000
Expected useful life in years 10
Expected net cash inflow per year $150,000
Discount rate 12%
Required:
Compute the payback period, under the assumption that cash inflows occur evenly throughout the year.
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