Arcano Corporation is considering producing a new automobile product, Shine. Research has determined that the company will be able to sell 60,000 units per year at $12. The product will be produced in a section of an existing factory that is currently not in use.
To produce Shine, Arcano must buy a machine that costs $400,000. The machine has an expected life of five years and will have an ending residual value of $15,000. Arcano will depreciate the machine over five years using the straight-line method. In addition to the cost of the machine, the company will incur incremental manufacturing costs of $570,000. Arcano has a tax rate of 30 percent, and the company's required rate of return is 8 percent. How much is the payback period?