A machine can be purchased for $222,000 and used for five years, yielding the fo

Question

A machine can be purchased for $222,000 and used for five years, yielding the following net incomes. In projecting net incomes, double-declining depreciation is applied, using a five-year life and a zero salvage value. Year 1 Year 2 Year 3 Year 4 Year 5 Net income $ 12,000 $ 32,000 $ 65,000 $ 40,000 $ 104,000 Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)

Computation of Annual Depreciation Expense Year Beginning Book Value Annual Depr. (40% of Book Value) Accumulated Depreciation at Year-End Ending Book Value 1 2 3 4 5 Annual Cash Flows Year Net income Depreciation Net Cash Flow Cumulative Cash Flow 0 $(222,000) $(222,000) 1 12,000 2 32,000 3 65,000 65,000 65,000 4 40,000 40,000 105,000 5 104,000 104,000 209,000 Payback period = years

Explanation / Answer

Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)

Computation of Annual Depreciation Expense Year Beginning Book Value Annual Depr. (40% of Book Value) Accumulated Depreciation at Year-End Ending Book Value 1 222000 88800 88800 133200 2 133200 53280 142080 79920 3 79920 31968 174048 47952 4 47952 19180.80 193228.80 28771.20 5 28771.20 28771.20 222000 0 Annual Cash Flows Year Net income Depreciation Net Cash Flow Cumulative Cash Flow 0 $(222,000) $(222,000) 1 12,000 88800 100800 121200 2 32,000 53280 142080 79920 3 65,000 31968 96968 (17048) 4 40,000 5 104,000 Payback period = 2.824 years

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