Compute the payback period for each of these two separate investments: a. A new operating system for an existing machine is expected to cost $270,000 and have a useful life of six years. The system yields an incremental after-tax income of $77,884 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. b. A machine costs $190,000, has a $14,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $43,000 per year after straight-line depreciation.

Compute the payback period for each of these two separate investments:

a.	A new operating system for an existing machine is expected to cost $270,000 and have a useful life of six years. The system yields an incremental after-tax income of $77,884 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000.
b.	A machine costs $190,000, has a $14,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $43,000 per year after straight-line depreciation.

a.

		Cost of investment		$270,000
Payback period	=		=		=	2.23 years
		Annual net cash flow		$121,217

  Where

Annual after-tax income	$	77,884
Plus depreciation*		43,333
Annual net cash flow	$	121,217

		$270,000 – $10,000
*Annual depreciation	=		=	$43,333
		6

b.

		Cost of investment		$190,000
Payback period	=		=		=	3.22 years
		Annual net cash flow		$59,000

  Where

Annual after-tax income	$	43,000
Plus depreciation*		16,000
Annual net cash flow	$	59,000

		$190,000 – $14,000
*Annual depreciation	=		=	$16,000
		11