Answer:
A. 2.2 years
B. 3.6 years
Explanation:
Payback period calculates the amount of the time it takes to recover the amount invested in a project from its cumulative cash flows.
Payback = amount invested / annual cash flows
Payback period is calculated using cash flows. So, the net income has to be changed to cash flows by adding back depreciation.
For the first machine
Straight line depreciation expense = (Cost of asset - salvage value) / number of years
( $520,000 - $10,000) / 6 = $85,000
Cash flow = $85,000 + $150,000 = $235,000
For the second machine, depreciation = ( $380,000 - $20,000) / 8 = $45,000
Cash flow = $45,000 + $60,000 = $105,000
Payback period for machine a = $520,000 / $235,000 = 2.2 years
Pay back period For machine b =
$380,000 / $105,000 = 3.6 years
I hope my answer helps you
