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

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 $520,000 and have a useful life of six years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000 b. A machine costs $380,000, has a $20,000 salvage value, is expected to last eight years, and will generate an after-tax income of $60,000 per year after straight-line depreciation. Payback Period Choose Choose Payback Period Numerator Denominator Payback period Type here to search

Explanation / Answer

Calculate payback period :

Payback period Choose numerator / Choose denominator = Payback period Initial investment / Annual net cash flow = Payback period A 520000 / 235000 = 2.21 years B 380000 / 105000 = 3.62 Years

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