Ch 11Ex 115 Exercise 11-5 Paybeck period computation; even cash flows LO P1 Comp
ID: 2589932 • Letter: C
Question
Ch 11Ex 115 Exercise 11-5 Paybeck period computation; even cash flows LO P1 Compute the payback period for each of these two separate investments 5 pores A new operating system for an existing machine s expected to cost $270000 and have a useful life of four years. The system ynelds an incremental after tax income of $77884 each year after deducting its straight-line depreciation. The predikted saivage value of the system is $10000 b. A machine coss $170000, has a $14,000 salvage value s expected to last eight years, and wn generate an atter ax income of $43.000 per year after straight line depreciation Choose hN s Payback periodExplanation / Answer
11-5 solution
A.
Annual depriciation=(270,000-10,000)/4
=$65,000
Annual net cash flow=annual after tax income+depriciation
=$77,884+65,000
=$142,884
Pay back period=cost of investment/annual net cash flow
=$270,000/142,884
=1.89 years
B.
Annual depriciation=(170,000-14000)/8
=$19,500
Annual net cash flow=annual after tax income+depriciation
=$43,000+19,500
=$62,500
Pay back period=cost of investment/annual net cash flow
=170,000/62,500
=2.72 years