Question

4.

A machine can be purchased for $248,000 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		$	16,000			$	41,000			$	68,000			$	56,500			$	139,000

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	$(248,000)			$(248,000)
1	16,000
2	41,000
3	68,000
4	56,500
5	139,000
Payback period =					years

Answer 1

Answer to part 1

Computation of Annual Depreciation Expense

Year	Opening Book Value	Annual Depreciation	Accumulated Depreciation	Ending Book Value
1	248000	99200	99200	148800
2	148800	59520	158720	89280
3	89280	35712	194432	53568
4	53568	21427.20	215859.20	32140.80
5	32140.80	12856.32	228715.52	19284.48

Answer to part 2

Computation of Annual Cash flow

Year	Net Income	Annual Depreciation	Net Cashflow	cummulative cashflow
0	-248000	0	-248000	-248000
1	16000	99200	115200	115200
2	41000	59520	100520	215720
3	68000	35712	103712	319432
4	56500	21427.20	77927.20	397359.20
5	139000	12856.32	151856.32	549215.52

Answer to part c

Payback period = 2 Years + (248000 - 215720)
(319432-215720)

= 2.311 Years