Answer:
2.53 years
Explanation:
For computing the payback period, first we have to find out the depreciation expense which is shown below:
= (Purchase value of machine - residual value) ÷ (useful life)
= ($250,000 - $0) ÷ (5 years)
= ($250,000) ÷ (5 years)
= $50,000
Now the cash flows would be
Year Net income Depreciation Net cash flow
Year 0 ($250,000)
Year 1 $17,000 $50,000 $67,000
Year 2 $42,000 $50,000 $92,000
Year 3 $119,000 $50,000 $169,000
Year 4 $63,500 $50,000 $113,500
Year 5 $168,000 $50,000 $218,000
As we add the first 2 year net cash flows than it would be $159,000
Now we deduct the $159,000 from the $2500,000 , so the amount would be $91,000 as if we added the third year cash inflow so the total amount exceed to the initial investment. Therefore, we subtract that, and the next year's cash inflow will be $169,000.
So, the payback period would be
= 2 years + $91,000 ÷ $169,000
= 2.53 years
