Question

Compute the payback period for each of these two separate investments: A new operating system for an existing machine is expected to cost $250,000 and have a useful life of five years. The system yields an incremental after-tax income of $72,115 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. A machine costs $170,000, has a $13,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $39,000 per year after straight-line depreciation.

Answer 1

The operating system has payback of 3.47 years

The machine has a payback of 4.36 years

Step-by-step explanation:

Payback period is the length of time taken for the initial investment to repay itself.

The project after the payback period would begin to yield returns on the investment.

Payback period=Initial investment/after-tax income per year

For the operating system the initial investment is the cost of $250,000

after-tax income is the incremental amount of $72,115

payback period=$250,000/$72,115=3.47 years

The machine has an initial capital outlay of $170,000

after tax income of $39,000

payback period=$170,000/$39,000=4.36 years