Question

Exercise 24-4 Payback period; accelerated depreciation LO P1

A machine can be purchased for $233,000 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		$	19,500			$	44,000			$	51,000			$	52,500			$	121,000

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	$(233,000)			$(233,000)
1	19,500
2	44,000
3	51,000
4	52,500
5	121,000
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 233000 93200 93200 139800 2 139800 55920 149120 83880 3 83880 33552 182672 50328 4 50328 20131 202803 30197 5 30197 30197 233000 0 Annual Cash Flows Year Net income Depreciation Net Cash Flow Cumulative Cash Flow 0 $(233,000) $(233,000) 1 19,500 93200 112700 (120300) 2 44,000 55920 99920 (20380) 3 51,000 33552 84552 64172 4 52,500 20131 72631 136803 5 121,000 30197 151197 288000 Payback period = 2.241 years