Question

Saved Exercise 11-5 Payback period computation; even cash flows LO P1 Compute the payback period for each of these two separate investments: a. A new operating system for an existing machine is expected to cost $260,000 and have a useful life of five years. The system yields an incremental after-tax income of $75,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. b. A machine costs $200,000, has a $14,000 salvage value, is expected to last nine years, and will generate an after-tax income of $41000 per year after straight-line depreciation. Choose Numerator: Cost of investment 250 000 200.000 Payback Period Choose Denominator Annual no cash flow $ - 1 Payback Period Payback period 897 81 years

Answer 1

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Ans: Choose Numerator: Cost of investment $260,000 $200,000 Payback Period Choose Denominator: Annual net cash flow $125,000 $61,667 Payback Period Payback Period 2.08 years 3.2432 years b. Workings Note-1: Investment-a: Cost of investment: $260,000 Annual net cash flow = after tax income + Depreciation = $75,000 + (($260,000 - $10,000)/5 years] = $75,000 + $50,000 = $125,000 Workings Note-2: Investment- b: Cost of investment: $200,000 Annual net cash flow = after tax income + Depreciation = $41,000 + ([$200,000 - $14,000)/9 years] = $41,000 + $20,667 = $61,667

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