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Katena32 [7]
3 years ago
13

Compute the payback period for each of these two separate investments: A new operating system for an existing machine is expecte

d to cost $280,000 and have a useful life of five years. The system yields an incremental after-tax income of $80,769 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $11,000. A machine costs $200,000, has a $15,000 salvage value, is expected to last seven years, and will generate an after-tax income of $44,000 per year after straight-line depreciation.
Business
1 answer:
Westkost [7]3 years ago
6 0

Answer and Explanation:

The computation of the payback period for each investment is shown below;

For Option 1

= Initial Investment ÷  Annual Cash Flow

= $280,000 ÷ $134,569

= 2.081 Year

Here Annual cash inflow is

= Net income + Depreciation

= $80,769 + (($280,000 - $11,000) ÷ 5)

= $134,569

For Option-2

= Initial Investment ÷ Annual Cash Flow

= $200,000 ÷ $70,429

= 2.84 Year

Here Annual cash inflow is

= Net income + Depreciation

= $44,000 + (($200,000 - $15,000) ÷ 7)

= $70,429

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