BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of instal

Question

BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value. DETERMINE THE CASH PAYBACK PERIOD? Please show how this problem was done, so I can learn it. Thanks.

Explanation / Answer

Hi, Cash outflow at the time of purchase = 29300 + 1500 - 2000 = 28800 This investment will be recovered in 4 (4*7000 = 28000) years + 800 (28800 - 28000)/7000 = 4.11 years. Thanks, Aman

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