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 $250,000 and have a useful life of b. A machine costs $190,000, has a $13,000 salvage value, is expected to last nine 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. Payback Period Choose Numerator: Choose Denominator: - | Payback Period Payback period a. b.

Explanation / Answer

Annual cash flows Investment 1 = 72115+(250000-10000)/5= 120115 Annual cash flows Investment 2 = 39000+(190000-13000)/9= 58667 Payback Period Choose Numerator: / Choose Denominator: = Payback Period Cost of investment / Annual net cash flow = Payback period a. 250000 / 120115 = 2.08 years b. 190000 / 58667 = 3.24 years

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