Sinclair is considering the acquisition of new machinery that will produce uniform benefits over the next five years. The following information is available: Annual savings in cash operating costs:$460,000 Annual depreciation expense:$360,000 If the company is subject to a 20% tax rate, what denominator should be used to compute the machinery's payback period

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Answer:

The denominator (net annual cash flow) = $440,000

Explanation:

The denominator (net annual cash flow)

Particular                                 Amount

Saving in operating cost        $460,000

Less: Depreciation                 $360,000

Net additional income   $100,000

Income tax on above (20%)   $20,000

Savings after tax                   $80,000

Add: Depreciation                  $360,000

Net annual cash benefit   $440,000

The denominator (net annual cash flow) = $440,000