Question

A machine can be purchased for $150,000 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 $10,000 $25,000 $50,000 $37,500 $100,000

Required:
Compute the machine's payback period.

Answer 1

Answer:

payback period = 4.275 years  

Explanation:

year            cash flow          balance

0                 -150,000           -150,000

1                     10,000            -140,000

2                   25,000             -115,000

3                   50,000             -65,000

4                   37,500              -27,500

5                 100,000              72,500

payback period is between the fourth and fifth year:

27,500 / 100,000 = 0.275

payback period = 4.275 years