Question

A machine can be purchased for $60,000 and used for five years, yielding the following net incomes. In projecting net incomes, straight-line depreciation is applied, using a five-year life and a zero salvage value.

	Year 1				Year 2				Year 3				Year 4				Year 5
Net income		$	3,900			$	9,900			$	32,000			$	14,700			$	39,600

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and round payback period answer to 3 decimal places.)

	Year Net Income Depreciation Net Cash Flow Cumulative Cash Flow 0 (60,000) $(60,000) 1 $3,900 2 9,900 3 32,000 4 14,700 5 39,600 Payback period =

Answer 1

Depreciation = 60000 / 5 = 12000

Year	Net Income	Depreciation	Net Cash Flow	Cumulative Cash Flow
0			(60,000)	$(60,000)
1	$3,900	12000	15900	(44100)             (Add 15900 to (60000))
2	9,900	12000	21900	(22200)              (Add 21900 to (44100))
3	32,000	12000	44000	21800               (Add 44000 to (22200))
4	14,700	12000	26700	48500                (Add 26700 to 21800)
5	39,600	12000	51600	100100                (Add 51600 to 48500)
Payback period= A + B / C A= last period of negative cumulative cash flow B=Absolute value of cumulative cash flow at end of period A C=Total cash inflow during period following A = 2 + 22200 / 26700    2   + 0.83    = 2.83 Years