Magnolia Company is considering the purchase of a $40,000 machine, which will be depreciated on the straight line basis over an 8 year period with no salvage value for both book and tax purposes The machine is expected to generate an annual pretax cash inflow of $15,000 The income tax rate is 40 Re...

1 Annual cash inflow before income tax 15000 15000 Less ...

Magnolia Company is considering the purchase of a $40,000 machine, which will be depreciated on the straight-line

Question:

Magnolia Company is considering the purchase of a $40,000 machine, which will be depreciated on the straight-line basis over an 8-year period with no for both book and tax purposes. The machine is expected to generate an annual pretax cash inflow of $15,000. The income tax rate is 40%.
Required:
(1) Determine the payback period.
(2) Compute the accounting rate of return on the original investment.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...