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salantis [7]
3 years ago
9

Project A requires a $280,000 initial investment for new machinery with a five-year life and a salvage value of $30,000. The com

pany uses straight-line depreciation. Project A is expected to yield annual net income of $20,000 per year for the next five years. Compute Project A's payback period.
Business
1 answer:
solong [7]3 years ago
5 0

Answer:

4 years

Explanation:

Payback period is the time in which a project returns back the initial investment in the form of net cash flow.

Initial Investment = $280,000

Net Income = $20,000

To calculate the net cash flows add bask the depreciation expense in Net income each year.

Depreciation = ($280,000 - $30,000) / 5 = $50,000

Net Cash Flow = $20,000 + $50,000 = $70,000

Payback period = Initial Investment / yearly cash flow = $280,000 / $70,000 = 4 years

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