Compute the payback period for each of these two separate investments: A new ope

Question

Compute the payback period for each of these two separate investments:

A new operating system for an existing machine is expected to cost $240,000 and have a useful life of five years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.

A machine costs $180,000, has a $13,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $38,000 per year after straight-line depreciation.

Payback Period Choose Numerator: / Choose Denominator: = Payback Period / = Payback period a. = b. =

Explanation / Answer

working Note:

a. annual net cash flow :

b.annual net cash flow:

choose numerator / choose denominator = payback period cost of investment / annual net cash flow = payback period a. 240,000 / 115,430 = 2.08 years b. 180,000 / 53,181.82 = 3.38 years

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