## Question

###### Compute the payback period for each of these two separate investments: A new operating system for...

Compute the payback period for each of these two separate investments: A new operating system for an existing machine is expected to cost $270,000 and have a useful life of five years. The system yields an incremental after-tax income of $77,884 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. A machine costs $180,000, has a $14,000 salvage value, is expected to last nine years, and will generate an after-tax income of $43,000 per year after straight-line depreciation.

Ch 24 Homework x + -ox W. € → C newconnect.mheducation.com/flow/connect.html ☆ Suggested Sites Imported From IE Ch 24 Homework i Saved Help Save & Exit Submit Check my work Exercise 24-5 Payback period computation; even cash flows LO P1 Compute the payback period for each of these two separate investments: 2.22 points eBook a. A new operating system for an existing machine is expected to cost $270,000 and have a useful life of five years. The system yields an incremental after-tax income of $77,884 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. b. A machine costs $180,000, has a $14,000 salvage value, is expected to last nine years, and will generate an after-tax income of $43,000 per year after straight-line depreciation. Hint Print References Payback Period Choose Numerator: 1 Choose Denominator: = Payback Period Payback period Mc Graw Hill Education < Prev 1 of 9 Next > 6:46

## Answers

Solution:

a. Annual depreciation = (270000- 10000) / 5 = $52000

Annual cash flows = 77884 + 52000 = $129,884

b.Annual depreciation = (180000- 14000) / 9 = $18,444

Annual cash flows = 43000 + 18444 = $61,444

Payback PeriodChoose Numerator/Choose Denominator=Payback PeriodCost of investment / Annual net Cash flow = Payback Period $2,70,000 / $1,29,884 = 2.08 $1,80,000 / $61,444 = 2.93

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