Question

Compute the payback period for each of these two separate investments: A new operating system for an existing machine is expected to cost $290,000 and have a useful life of six years. The system yields an incremental after-tax income of $83,653 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $11,000. A machine costs $210,000, has a $15,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $46,000 per year after straight-line depreciation.

Answer 1

Project A's payback period = 2.23 years

Project B's payback period = 3.3 years

Step-by-step explanation:

project A project B

initial investment $290,000 $210,000

useful life 6 years 11 years

yearly cash flow $83,653 + $46,500 $46,000 + $17,727

= $130,153 = $63,727

salvage value $11,000 $15,000

payback period $290,000 / $130,153 $210,000 / $63,727

= 2.23 years = 3.3 years