PLEASE DO PROBLEM A machine can be purchased for $60,000 and used for five years, yielding...

PLEASE DO PROBLEM

A machine can be purchased for $60,000 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		$	3,900		$	9,900		$	32,000		$	14,700		$	39,600

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.)

Year	Net Income	Depreciation	Net Cash Flow	Cumulative Cash Flow
0			(60,000)	$(60,000)
1	$3,900
2	9,900
3	32,000
4	14,700
5	39,600

Payback period =

Expert Solution

All working forms part of the answer
Payback period is the period in which the amount initially invested is recovered.
In our question , $ 60,000 is invested and Payback period will be calculated to see when that $60,000 is recovered back as Cash Inflow.
Cash Inflow = Net Income + Depreciation, because Depreciation is a non-cash item that reduces the net income, hence it is to be added back.
Straight Line Depreciation = Cost / Life = $60,000 / 5 year = $ 12,000 per year
Working

Year	Net Income	Depreciation	Net Cash Flow	Cumulative Cash Flow
[Period]	[A]	[B]	[C=A + B]	[D = D + C]
0			$ (60,000.00)	$ (60,000.00)
1	$ 3,900.00	$ 12,000.00	$ 15,900.00	$ (44,100.00)
2	$ 9,900.00	$ 12,000.00	$ 21,900.00	$ (22,200.00)
3	$ 32,000.00	$ 12,000.00	$ 44,000.00	$ 21,800.00
4	$ 14,700.00	$ 12,000.00	$ 26,700.00	$ 48,500.00
5	$ 39,600.00	$ 12,000.00	$ 51,600.00	$ 1,00,100.00

From above working it is clear that out of $60,000, $ 48,500 is recovered in 4 years. Remaining $ 11,500 is recovered during the year 5.

Time taken to recover $ 11,500 in year 5 = $11,500 / $ 51,600 = 0.223

Hence, total payback period = 4 years + 0.223 = 4.223 years

ekkarill92 answered 1 year ago

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