Question

A machine can be purchased for $150,000 and used for five years, yielding the following net incomes. In projecting net incomes, double-declining depreciation is applied using a five-year life and a zero salvage value.

Year 1 Year 2 Year 3 Year 4 Year 5
Net income $10,000 $25,000 $50,000 $37,500 $100,000

Required:
Compute the machine's payback period.

Answer 1

payback period = 4.275 years

Step-by-step explanation:

year cash flow balance

0 -150,000 -150,000

1 10,000 -140,000

2 25,000 -115,000

3 50,000 -65,000

4 37,500 -27,500

5 100,000 72,500

payback period is between the fourth and fifth year:

27,500 / 100,000 = 0.275

payback period = 4.275 years