Answer:
1.
2.2 years
2.
3.6 years
Explanation:
Payback period is the time in which a project returns back the initial investment in the form of net cash flow. For this purpose we use the net cash flows to calculate the payback.
1.
to calculate the net cash flow we need to adjust the depreciation in incremental after tax income.
Depreciation = ( $520,000 - $10,000 ) / 6 = $85,000
Add this depreciation in the depreciation in incremental after tax income.
Net Cash flow = $150,000 + $85,000 = $235,000
Payback Period = Initial Investment / Incremental net cash flow each year
Payback Period = $520,000 / $235,000 = 2.2 years
2.
to calculate the net cash flow we need to adjust the depreciation in incremental after tax income.
Depreciation = ( $380,000 - $20,000 ) / 8 = $45,000
Add this depreciation in the depreciation in incremental after tax income.
Net Cash flow = $60,000 + $45,000 = $105,000
Payback Period = Initial Investment / Incremental net cash flow each year
Payback Period = $380,000 / $105,000 = 3.6 years
