Question

Payback period computation; even cash flows LO P1

Answer 1

Answer:

$520,000 / $235,000 = 2.2 years

$380,000 / $105,000 = 3.6 years

Explanation:

Payback period calculates how long it takes to recover the amount invested in a project from its cumulative cash flows

Payback period = amount invested / cash flow

Cash flow = net income + depreciation expense

Depreciation expense using the straight line depreciation expense = (cost of asset - salvage value) / number of years

A. ($520,000 - $10,000) / 6 = $85,000

cash flow = $150,000 + $85,000 = $235,000

$520,000 / $235,000 = 2.2 years

B. ($380,000 - $20,000) / 8 = $45,000

$45,000 +  $60,000 = $105,000

$380,000 / $105,000 = 3.6 years