Question

A widget machine will cost $480,000. The anticipated increase in revenue will be $140,000/year for 5-years. Annual expenses will be $30,000/year for 5-years. The depreciable life is estimated to be 5-years and the salvage value will equal $35,000. Additional inventory necessary to run the machine will be $26,000. Initial training expenses are $20,000. Tax rate equals 40%. A.  Find the discounted payback and convert this into a percentage.

Answer 1

Initial Investmeny = Purcahse price of equipment + value of inventory used + inital training \

= 480000 + 26000 + 20000 = 526000

Depreciation = ( Historical cost - salvage value ) / no of years = ( 480000 - 35000) / 5 = 89000

Particulars	1	2	3	4	5
Revenue (A)	140000	140000	140000	140000	140000
Expenses (B)	30000	30000	30000	30000	30000
Depreciation (C )	89000	89000	89000	89000	89000
Profit before tax (A -B-C)	21000	21000	21000	21000	21000
Tax (E)	8400	8400	8400	8400	8400
Cash flow (F =D - E + C)	101600	101600	101600	101600	101600
Salvage value (G)	0	0	0	0	35000
refund of Inventory (H)	0	0	0	0	26000
Total cash flow (I = F + G+ H)	101600	101600	101600	101600	162600
Cummulative cash flows	101600	203200	304800	406400	569000

Payback beriod = 4 + ( 526000 - 406400) / 162600 = 4.74 years

The discount rate is missing to calculate the payback period.

Payback period = 4.74 / 5 = 94.8%