Question

Compute the payback period for each of these two separate investments:

A new operating system for an existing machine is expected to cost $240,000 and have a useful life of five years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.

A machine costs $180,000, has a $13,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $38,000 per year after straight-line depreciation.

Payback Period
	Choose Numerator:	/	Choose Denominator:	=	Payback Period
		/		=	Payback period
a.				=
b.				=

Answer 1

	choose numerator	/	choose denominator	=	payback period
	cost of investment	/	annual net cash flow	=	payback period
a.	240,000	/	115,430	=	2.08 years
b.	180,000	/	53,181.82	=	3.38 years

working Note:

a. annual net cash flow :

after tax income	69,230
annual deprecition under straight line method (240,000-9,000) / 5	46,200
annual net cash flow	115,430

b.annual net cash flow:

after tax income	38,000
depreciation (180,000 - 13,000) / 11 years	15,181.82
net cash flow	53,181.82