Question

A machine can be purchased for $290,000 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.

Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)

	Computation of Annual Depreciation Expense Year Beginning Book Value Annual Depr. (40% of Book Value) Accumulated Depreciation at Year-End Ending Book Value 1 2 3 4 5 Annual Cash Flows Year Net income Depreciation Net Cash Flow Cumulative Cash Flow 0 $(290,000) $(290,000) 1 11,500 2 33,000 3 66,000 4 43,000 5 100,000 Payback period = years

Answer 1

Computation of Annual Depreciation Expense
Year	Beginning Book Value	Annual Depr. (40%of Book Value)	Accumulated Depreciation at Year-End	Ending Book Value
1	$290,000	$116,000	$116,000	$174,000
2	$174,000	$69,600	$185,600	$104,400
3	$104,400	$41,760	$227,360	$62,640
4	$62,640	$25,056	$252,416	$37,584
5	$37,584	$15,034	$267,450	$22,550
Year	Net Income	Depreciation	Net Cash Flow	Cumulative cash flow
0	($290,000)	-	($290,000)	($290,000)
1	$11,500	$116,000	$127,500	($162,500)
2	$33,000	$69,600	$102,600	($59,900)
3	$66,000	$41,760	$107,760	$47,860
4	$43,000	$25,056	$68,056	$115,916
5	$100,000	$15,034	$115,034	$230,950
			Payback period =	2.56 years