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[The following information applies to the questions displayed below
[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.
Compute the Project's Payback Period.
Expert Solution
| 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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