QS 24-5 Payback period LO P1 Project A requires a $280,000 initial investment fo

Question

QS 24-5 Payback period LO P1

Project A requires a $280,000 initial investment for new machinery with a five-year life and a salvage value of $30,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $20,000 per year for the next five years.

Project A requires a $280,000 initial investment for new machinery with a five-year life and a salvage value of $30,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $20,000 per year for the next five years.

Explanation / Answer

Annulal depreciation on machinary =   ($280,000 -  $30,000) / 5 years = $50,000

Annual net cash flow =  Annual net income + Annulal depreciation = $20,000 + $50,000 = $70,000

Project A's payback period = Initial investment / Annual net cash flow = $280,000 / $70,000 = 4 years

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