Question

A machine can be purchased for $180,000 and used for five years, yielding the following net incomes. In projecting net incomes, straight-line 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		$	12,100			$	30,100			$	69,000			$	45,300			$	120,400
Year Net Income Depreciation Net Cash Flow Cummulative Cash Flow 0 (180,000) (180,000) 1 12,100 2 30,100 3 69,000 4 45,300 5 120,400
Payback Period:

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and round payback period answer to 3 decimal places.)
  

Answer 1

Year	Net Income	Depreciation	Net Cash Flow	Cumulative Cash Flow
0			$(180,000.00)	$      (180,000.00)
1	$ 12,100.00	$           36,000.00	$   12,100.00	$      (167,900.00)
2	$ 30,100.00	$           36,000.00	$   30,100.00	$      (137,800.00)
3	$ 69,000.00	$           36,000.00	$   69,000.00	$       (68,800.00)
4	$ 45,300.00	$           36,000.00	$   45,300.00	$       (23,500.00)
5	$120,400.00	$           36,000.00	$ 120,400.00	$        96,900.00

Payback Period =	A+	B
		C

In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Payback Period =	4+	$            23,500.00
		$          120,400.00
Payback Period =	(4+0.195)	4.195	Years