Ask Question
27 February, 09:51

Compute the payback period for each of these two separate investments: A new operating system for an existing machine is expected to cost $290,000 and have a useful life of six years. The system yields an incremental after-tax income of $83,653 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $11,000. A machine costs $190,000, has a $15,000 salvage value, is expected to last eight years, and will generate an after-tax income of $46,000 per year after straight-line depreciation.

+4
Answers (1)
  1. 27 February, 11:13
    0
    Payback period is the number of years it takes a project's expected future cashflows to fully recover the initial outlay.

    a.) New Operating system;

    Year CF Net CF

    0 - 290,000 - 290,000

    1 83,653 - 206,347

    2 83,653 - 122,694

    3 83,653 - 39,041

    4 83,653 44,612

    Payback period = last year with negative net CF + (absolute value of Net CF that year / Total CF the following year)

    Payback = 3 + (39,041 / 83,653)

    = 3 + 0.4667

    = 3.47 years

    b.) Machine

    Year CF Net CF

    0 - 190,000 - 190,000

    1 46,000 - 144,000

    2 46,000 - 98,000

    3 46,000 - 52,000

    4 46,000 - 6,000

    5 46,000 40,000

    Payback period = 4 + (6,000/46,000)

    = 4+0.1304

    = 4.13 years
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Compute the payback period for each of these two separate investments: A new operating system for an existing machine is expected to cost ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers