Depreciation rate = (100 / 5) X 2 = 40%
Depreciation expense:
Year 1 = $350,000 X 40% = $140,000
Year 2 = $210,000 X 40% = $84,000
Year 3 = $126,000 X 40% = $50,400
Year 4 = $75,600 X 40% = $30,240
Year 5 = $45,360 X 40% = $18,144
Cash flows = Depreciation + Net income
Year 1 = $140,000 + ($50,000) = $90,000
Year 2 = $84,000 + $26,000 = $110,000
Year 3 = $50,400 + $319,600 = $370,000
Year 4 = $30,240 + $39,760 = $70,000
Year 5 = $18,144 + $49,640 = $67,784
Cash flows of first two years = $90,000 + $110,000 = $200,000
Remaining cash flows for payback = $350,000 - $200,000 = $150,000
$150,000 is recovered in third year.
Time taken to recover $150,000 in third year = $150,000 / $370,000 = 0.405 years
Payback period = 2.405 years
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