Question

Exercise 5 a. A new operating system for an existing machine is expected to cost $520,000 and have a useful life of 6 years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000 b. A machine costs $380,000, has a $20,000 salvage value is expected to last 8 years, and will generate an after tax income of $60,000 per year after straight-line depreciation. Compute the payback period for each of these two separate investments Homework 5 a. A new operating system for an existing machine is expected to cost $250,000 and have a useful life of 5 years. The system yields an incremental after-tax income of $72,200 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. b. A machine costs $215,000, has a $35,000 salvage value, is expected to last 9 years, and will generate an after tax income of $46,400 per year after straight-line depreciation. Compute the payback period for each of these two separate investments:

Answer 1

5)

a)Depreciation expense = [cost- salvage value ]/useful life

                                      =[520000 - 10000]/ 6

                                       = 510000/ 6

                                      = 85000

Annual cash flow = After tax income +Depreciation expense

                          = 150000 +85000

                         = 235000

Payback period = Initial investment /annual cash flow

                        = 520000/235000

                        = 2.21 years

b)

Depreciation expense = [cost- salvage value ]/useful life

                                      =[380000 - 20000]/ 8

                                       =360000/ 8

                                      =45000

Annual cash flow = After tax income +Depreciation expense

                          = 60000+45000

                         = 105000

Payback period = Initial investment /annual cash flow

                        = 380000/ 105000

                        =3.62 years

Homework 5)

a)

Depreciation expense = [cost- salvage value ]/useful life

                                      =[250000 - 10000]/ 5

                                       = 240000/ 5

                                      = 48000

Annual cash flow = After tax income +Depreciation expense

                          = 72200+48000

                         = 120200

Payback period = Initial investment /annual cash flow

                        = 250000/120200

                        = 2.08 years

b)

Depreciation expense = [cost- salvage value ]/useful life

                                      =[215000 - 35000]/ 9

                                       = 180000/9

                                      = 20000

Annual cash flow = After tax income +Depreciation expense

                          = 46400+20000

                         = 66400

Payback period = Initial investment /annual cash flow

                        = 215000/66400

                        = 3.24 years