Question

Exercise 24-3 Payback period computation; straight-line depreciation LO P1

A machine can be purchased for $60,000 and used for five years, yielding the following net incomes. In projecting net incomes, straight-line 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		$	3,900			$	9,900			$	32,000			$	14,700			$	39,600

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and round payback period answer to 3 decimal places.)
  

Year	Net Income	Depreciation	Net Cash Flow	Cumulative Cash Flow
0			(60,000)	$(60,000)
1	$3,900
2	9,900
3	32,000
4	14,700
5	39,600
Payback period =

Answer 1

Year	Net income	Depreciation	Cash flow	Cumulative Cash flow
0			$ (60,000)	$                          (60,000)
1	$         3,900	$          12,000	$   15,900	$                          (44,100)
2	$         9,900	$          12,000	$   21,900	$                          (22,200)
3	$       32,000	$          12,000	$   44,000	$                            21,800
4	$       14,700	$          12,000	$   26,700	$                            48,500
5	$       39,600	$          12,000	$   51,600	$                          100,100

Payback period = 2 years + ($22,200/$44,000)

Payback period = 2.505 years