4. value: 16.66 points Compute the payback period for each of these two separate

Question

4. value: 16.66 points 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 b. A machine costs $170,000, has a $13,000 salvage value, is expected to last seven years, and will four 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 generate an after-tax income of $39,000 per year after straight-line depreciation Payback Period Choose Numerator: Choose Denominator: Payback Period Payback period a. b.

Explanation / Answer

Pay back Period Choose Numerator / Choose Denominator = Payback Period Initial investment / Annual Net cash flow = Payback Period a. 250,000 / 132,115 = 1.89 Years b. 170,000 / 39,000 = 4.36 Years Workings. a Depreciation = (Cost of the asset - salvage value)/ Life of the asset       = (250,000 - 10,000)/ 4       = 60,000 Annual Net cash flow       = 60,000 + 72,115 = $ 132,115

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