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Homework answers / question archive / [The following information applies to the questions displayed below

[The following information applies to the questions displayed below

Management

[The following information applies to the questions displayed below.]

 

Project A requires a $385,000 initial investment for new machinery with a five-year life and a salvage value of $48,500. The company uses straight-line depreciation. Project A is expected to yield annual net income of $20,500 per year for the next five years.

Screenshot 2021-05-02 9.54.18 PM.pngCompute the Project's Payback Period.

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Computation of Payback Period:
  Choose Numerator: / Choose Denominator: = Payback Period
  Cost of Investment / Annual Net Cash Flow = Payback period
  $385,000   / $87,800   = 4.38 years

 

 

Working:

Annual Depreciation Expense = (Cost of Machine - Salvage Value)/Useful Life

= ($385,000 - $48,500)/5

= $336,500/5

= $67,300

 

Annual Cash Inflow = Annual Net Income + Annual Depreciation Expense

= 20,500 + 67,300

= $87,800

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