Question

Check my work Required information Use the following information for the Quick Study below. (The following information applies to the questions displayed below.) Part 1 of 2 Project A requires a $375,000 initial investment for new machinery with a five-year life and a salvage value of $42,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $27,700 per year for the next five years. 1.25 points QS 24-5 Payback period LO P1 eBook Hint Compute Project A's payback period. Ask Print Payback Period Choose Denominator: Choose Numerator: - Payback Period - Payback period References

Answer 1

Initial investment = $375,000

Salvage value = $42,000

Useful life = 5 years

Annual depreciation = (Initial investment - Salvage value)/Useful life

= (375,000 - 42,000)/5

= 333,000/5

= $66,600

Annual net income = $27,700

Annual cash inflow = Annual net income + Annual depreciation

= 27,700 + 66,600

= $94,300

Initial investment	/	Annual cash inflow	=	Payback period
375,000	/	94,300	=	3.98 years

There is no instruction regarding rounding off. If rounding off is done to the nearest whole number, then payback period will be 4 years.

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