Question

A machine can be purchased for $236,000 and used for five years, yielding the following net incomes. In projecting net incomes double-declining depreciation is applied using a five-year life and a zero salvage value. Net income Year 1 $15,000 Year 2 $50,000 Year 3 $72,000 Year 4 $37,500 Years $120,000 Compute the machine's payback period (ignore taxes). (Round payback period answer to 3 decimal places.) Beginning Book Value Computation of Annual Depreciation Expense Annual Dept. (40% Accumulated of Book Value) Depreciation at Year End Ending Book Value Annual Cash Flows Depreciation Net Cash Flow Net Income Cumulative Cash Flow $ 276.000) $ 236,000) 15.000 50,000 72.000 37 500 120,000 72.000 37.500 120.000 72.000 109,500 229.500 Payback period years

Answer 1

		Computation of Annual depreciation expense
	Year	Beginning book value	Annual depr. (40% of book value)	Accumulated depreciation at year end	Ending book value
		a	b=a*40%	c	d=a-b
	1	236000	94400	94400	141600
	2	141600	56640	151040	84960
	3	84960	33984	185024	50976
	4	50976	20390.4	205414.4	30585.6
	5	30585.6	12234.24	217648.64	18351.36
		Annual cash flows
	Year	Net income	Add: Depreciation	Net cash flow	Cumulative cash flow
	0	0		-236000	-236000
	1	15000	94400	109400	-126600
	2	50000	56640	106640	-19960
	3	72000	33984	105984	86024
	4	37500	20390.4	57890.4	143914.4
	5	120000	12234.24	132234.24	276148.64
	Payback period=Years before full recovery of cost+(Unrecovered cash flow at the start of the year/Cashflow during the year)=2+(19960/105984)=2+0.188=2.188 years