A new operating system for an existing machine is expected to cost $300,000 and have a useful life of six years. The system yields an incremental after-tax income of $86,538 each year after deducting its straight-line depreciation.
The predicted salvage value of the system is $12,000.
Compute the payback period.
The payback period is one of the several methods used for assessing a given project or investment. It indicates the time period over which the initial investment gets recovered by means of expected annual cash flows. While determining the payback period, the time value of money is usually ignored.
Answer and Explanation: 1
The calculated value of the payback period is 2.23 years.
The annual depreciation expense under the straight line method is given by:
- = (Cost of the...
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fromChapter 5 / Lesson 24
Learn the meaning and purpose of the payback period method. Learn how to calculate the payback period, and understand the advantages and limitations of using this method.