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Gio's company purchased a new machine on January 1 of this year for $90,000, with an...

Gio's company purchased a new machine on January 1 of this year for $90,000, with an estimated useful life of 5 years and a salvage value of $10,000. The machine will be depreciated using the straight-line method. The machine is expected to produce cash flow from operations, net of income taxes, of $36,000 a year in each of the next 5 years. The new machine’s salvage value is $20,000 in years 1 and 2, and $15,000 in years 3 and 4. What will be the bailout period for the new machine?

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Answer #2
Bailout payback
At the end of year Cash flow Salvage value Cummulative pay back
1 36000 20000 56000
2 72000 20000 92000
3 108000 15000 123000
4 144000 15000 159000
5 180000 10000 190000 
Bailout period is the period in which initial investment is recovered (Incluidng Salvage values)

Bailout period  
=  Year before full recovery + (Uncovered cost at the start of the year / cash                           flow during the year)

1 + 54000/56000

= 1 + 0.964

= 1.964 years

Pls do rate, if the answer is correct and comment, if any further assistance is required.
answered by: anonymous
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