Question

A machine can be purchased for $225,000 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		$	13,000			$	28,000			$	60,000			$	40,000			$	125,000

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	$(225,000)			$(225,000)
1	13,000
2	28,000
3	60,000
4	40,000
5	125,000
Payback period =					years

Answer 1

Computation of Annual Depreciation Expense
Year	Beginning Book Value	Annual Depr. (40% of Book Value)	Accumulated Depreciation at Year-End	Ending Book Value
1	225000	90000	90000	135000
2	135000	54000	144000	81000
3	81000	32400	176400	48600
4	48600	19440	195840	29160
5	29160	29160	225000	0
Annual Cash Flows
Year	Net income	Depreciation	Net Cash Flow	Cumulative Cash Flow
0	($225,000)			($225,000)
1	13,000	90000	103,000	-122,000
2	28,000	54000	82,000	-40,000
3	60,000	32400	92,400	52,400
4	40,000	19440	59,440	111,840
5	125,000	29160	154,160	266,000
Payback period =2+(40000/92400)				2.433	years