Exercise 11-5 Payback period computation; even cash flows LO P1 Compute the payb

Question

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 $270,000 and have a useful life of six years. The system yields an incremental after-tax income of $77,884 each year after deducting its straight-line depreciation. The predicted salvege value of the system is $10,000 b. A machine costs $130,000 has a $14,000 salvage value, s expected to last eleven years and will enrate an afer sa $43,000 per year after straight-line depreciation. Payback Period Choose Numerator Choose Denominator Payback Period Payback period a.

Explanation / Answer

Payback period :

Choose numerator / Choose denominator = Payback period Initial investment / Annual cash flow = Payback period a 270000 / 121217 = 2.23 yearrs b 190000 / 59000 = 3.22 years

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