Question

A machine can be purchased for $222,000 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			$	49,000			$	59,000			$	57,500			$	105,000

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 $(222,000) $(222,000) 1 19,000 2 49,000 3 59,000 59,000 59,000 4 57,500 57,500 116,500 5 105,000 105,000 221,500 Payback period = years

Answer 1

Computation of Annual depreciation Expenser Year Begining Annual depreciation (40l of book value) Ending Book value Accumulated depreciation at year-end Book - value 222,000 88,800 88,800 133200 133,200 53280 142080 79,920 79.920 31,908 174048 441952 47,952 19180.8 28771-20 28,77120 28,711:20 193228.80 222,000

Annual Cash Hows Year Net Income Depreciation Net cash flow Commulative Cash flow. $1222,000) 0 $(222,000) $19.000 $88,800 $107,800 $ (11201200) - $ (11,920) $49,000 $53,280 $102,280 03 $ 79,048 $59.000 $31,968 $90,968 ~ $ 155,728.8 761680-8 54,500 $571500 $19.180.8 + $2891440 133,711-2 $105,000 6 $28,711-20 Pay 11,920 Pay-back penod: 2+ 90,968 = 8+ 0.1310 = 2.131 years. Il

Computation of Annual depreciation Expenser Year Begining Annual depreciation (40l of book value) Ending Book value Accumulated depreciation at year-end Book - value 222,000 88,800 88,800 133200 133,200 53280 142080 79,920 79.920 31,908 174048 441952 47,952 19180.8 28771-20 28,77120 28,711:20 193228.80 222,000

Annual Cash Hows Year Net Income Depreciation Net cash flow Commulative Cash flow. $1222,000) 0 $(222,000) $19.000 $88,800 $107,800 $ (11201200) - $ (11,920) $49,000 $53,280 $102,280 03 $ 79,048 $59.000 $31,968 $90,968 ~ $ 155,728.8 761680-8 54,500 $571500 $19.180.8 + $2891440 133,711-2 $105,000 6 $28,711-20 Pay 11,920 Pay-back penod: 2+ 90,968 = 8+ 0.1310 = 2.131 years. Il