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

Question

Compute the payback period for each of these two separate investments: a. A new operating system for an existing machine is expected to cost $280,000 and have a useful life of four years. The system yields an incremental after-tax income of $80,769 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $11,000. b. A machine costs $170,000, has a $15,000 salvage value, is expected to last eight years, and will generate an after-tax income of $44,000 per year after straight-line depreciation.

Explanation / Answer

Depreciation under Machine A = (280000-11000)/4 = 67250

Cash flow = 67250 + 80769 = 148019

Depreciation under MAchine B= (170000-15000)/ 8 = 19375

Cash flow = 44000+19375 = 63375

Payback epriod =Initial investment /cash flow

Machine A = 280000/148019 = 1.89 years

Machin e B = 170000/63375 = 2.68 years

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