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 $60,000 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 $ 3,900 $ 9,900 $ 32,000 $ 14,700 $ 39,600

Explanation / Answer

Payback period = 2 years + ($22,200/$44,000)

Payback period = 2.505 years

Year Net income Depreciation Cash flow Cumulative Cash flow 0 $ (60,000) $                          (60,000) 1 $         3,900 $          12,000 $   15,900 $                          (44,100) 2 $         9,900 $          12,000 $   21,900 $                          (22,200) 3 $       32,000 $          12,000 $   44,000 $                            21,800 4 $       14,700 $          12,000 $   26,700 $                            48,500 5 $       39,600 $          12,000 $   51,600 $                          100,100

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