Question

Saved Help Save & Exit heck my work mode : This shows what is correct or incorrect for the work you have completed so far. It does not indicate completion Return to 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 $280,000 and have a useful life of six years. The system yielo an incremental after-tax income of $80,769 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $1,000. b. A machine costs $180,000, has a $15,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $44,000 per year after straight-line depreciation. Answer is complete but not entirely correct. Payback Period Choose Denominator: Payback Period Choose Numerator: Cost of investment Annual net cash flow Payback period years years 280,000 125,602 a. 2.23 61,000 b. 180,000 2.95 II II %24 %24

Answer 1

b. Annual depreciation = (180000-15000)/11 = $15000

Annual cash inflows = Net income + Depreciation

= 44000+15000 = $59000

Payback period = Cost of investment / Annual net cash flow

= 180000 / 59000

= 3.05 years