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 $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 $190,000, has a $15,000 salvage value, is expected to last eight years, and will generate an after-tax income of $46,000 per year after straight-line depreciation.

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

Explanation / Answer

Calculate payback period :

Payback Period Choose Numerator: / Choose Denominator: = Payback Period Initital investment / Annual cash flow = Payback period a. 290000 / 130153 = 2.23 years b. 190000 / 67875 = 2.80 years

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