Question

A machine can be purchased for $270,000 and used for five years, yielding the following net incomes. In projecting net incomes, double-declining depreciation is applied, using a five-year life and a zero salvage value. Year 1 Year 2 Year 3 Year 4 Year 5 Net income $ 19,000 $ 28,000 $ 58,000 $ 49,500 $ 103,000 Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)

Answer 1

Double Declining Balance Method
Useful Life		5	Years
Cost		$                             2,70,000
Residual Value		$                                          -
Depreciable Value		$                             2,70,000
Depreciation Rate		40.00%
Year	Depreciation Expenses	Acc Depreciation	Book Value End Of Year
1	$                           1,08,000	$                             1,08,000	$                          1,62,000
2	$                               64,800	$                             1,72,800	$                             97,200
3	$                               38,880	$                             2,11,680	$                             58,320
4	$                               23,328	$                             2,35,008	$                             34,992
5	$                               13,997	$                             2,49,005	$                             20,995
Annual Cash Flow = Net Income + Depreciation
Year	Net Income	Depreciation	Cash Flow
1	$                               19,000	$                             1,08,000	$                          1,27,000
2	$                               28,000	$                                 64,800	$                             92,800
3	$                               58,000	$                                 38,880	$                             96,880
4	$                               49,500	$                                 23,328	$                             72,828
5	$                           1,03,000	$                                 13,997	$                          1,16,997
Payback period
Year	Cash Flow	Accumulated Cash Flow
0	-270000	-270000
1	$                           1,27,000	$                           -1,43,000
2	$                               92,800	$                               -50,200
3	$                               96,880	$                                 46,680
4	$                               72,828	$                             1,19,508
5	$                           1,16,997	$                             2,36,505
	Payback period = 2 Years +50200/96880
	=2.518 years