Exercise 24-3 Payback period computation; straight-line depreciation LO P1 A mac

Question

Exercise 24-3 Payback period computation; straight-line depreciation LO P1

A machine can be purchased for $100,000 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.

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 1 Year 2 Year 3 Year 4 Year 5 Net income $ 6,700 $ 16,700 $ 38,000 $ 25,100 $ 66,800

Explanation / Answer

Calculate payback period :

Payback period = 2 years +36600/58000 = 2.631 years

Year Net income Depreciation Net cash flow Cumulative cash flow 0 -100000 -100000 1 6700 100000/5 = 20000 26700 -73300 2 16700 20000 36700 -36600 3 38000 20000 58000 21400 4 25100 20000 55100 76500 5 66800 20000 88800 165300

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