Exercise 25-5 Payback period computation; even cash flows LO P Compute the payba

Question

Exercise 25-5 Payback period computation; even cash flows LO P Compute the payback period for each of these two separate investments a. A new operating system for an existing machine is expected to cost $250,000 and have a useful life of five years. The system yields an incremental after-tax income of $72,115 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. b. A machine costs $180,000, has a $13,000 salvage value, is expected to last ten years, and will generate an after-tax income of $39,000 per year after straight-line depreciation. Payback Period Choose Numerator: | 1 | Choose Denominator: Payback Period Payback period b.

Explanation / Answer

Payback period :

Payback period Choose numerator / Choose denominator = Payback period Initial investment / Annual cash flow = Payback period a 250000 / (48000+72115) = 120115 = 2.08 Years b 180000 / (16700+39000) = 55700 = 3.23 Years

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