Using the format in the picture compute the pay back period for each of these tw

Question

Using the format in the picture compute the pay back period for each of these two separate investments 2· value 10.00 points Compute the payback period for each of these two separate investments a. A new operating system for an existing machine is expected to cost $250,000 and have a useful life of b. A machine costs $200,000, has a $13,000 salvage value, is expected to last eight years, and will 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. generate an after-tax income of $39,000 per year after straight-line depreciation. Choose Numerator: 1 Choose Denominator: Payback period Payback period a. b.

Explanation / Answer

Payback Period Choose Numerator / Choose Denominator = Payback period a $ 250,000 / $120,115                            2.08 b $200,000 / $ 62,375                            3.21 Workings Payback period = Cost of investment / annual net cashflow Annual net cashflow = annual after tax income + depreciation Depreciation = (Initial cost - Salvage Value)/ usefullife Operating system New Machine Depreciation ($ 250,000 - $ 10,000) / 5 ($ 200,000 -$13,000)/8 = $                                  48,000 $                   23,375 Annual net cashflow = $ 72,115 + $ 48,000 $ 39,000 + $ 23,375 = $                              1,20,115 $                   62,375

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