Question

Compute the payback for each of these two seperate investments:

a. A new operating system for an existing machine is expected to cost $250000 and have a useful life of 6 years. The system yields an incremental after-tax income of $72115 each year after deducting its straight line depreciation. The predicted salvage value of the system is $10000.

b. A machine costs $200,000, has a $13,000 salvage value, is expected to last eight years, and will generate an after-tax income of $39,000 per year after straight-line depreciation.

Answer 1

a. 2.23

b. 3.21

Step-by-step explanation:

a. Answer to Part A

Payback Period = Investment / Annual Cash Inflow

= 250000 / 112115

= 2.23

Answer to Part B

Payback Period = Investment / Annual Cash Inflow

= 200000 / 62375

= 3.21

Working Note

Particulars Case A Case B

After Tax Income 72115 39000

Add: Depreciation 40000 23375

Cash Inflow 11,2115 62375

Particulars Case A Case B

Cost of Machine 250000 200000

Less: salvage Value 10000 13000

Depreciable Value 240000 187000

Life of the Asset 6 8

Annual Depreciation 40000 23375