BUS340_ch25_assign-1_1_

# BUS340_ch25_assign-1_1_ -...

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Compute the payback period for each of these two separate investments: a. A new operating system for an existing machine is expected to cost \$520,000  and have a useful life of six years. The system yields an incremental after-tax  income of \$150,000 each year after deducting its straight-line depreciation.  The predicted salvage value of the system is \$10,000.  b. A machine costs \$380,000, has a \$20,000 salvage value, is expected to last  eight years, and will generate an after-tax income of \$60,000 per year after  straight-line depreciation. Payback period = Cost of investment                              Annual net cash flow a. 520,000 / 140,000 (150,000 – 10,000) = 3.7 years b. 380,000 / 40,000 (60,000 – 20,000) = 9.5 years  Exercise 25-1 Payback period  computation; even cash  flows P1 a. Payback period = = = 2.21 years where Annual after-tax income. .............................................................. \$150,000 Plus depreciation*. ....................................................................... 85,000 Annual net cash flow. ................................................................... \$235,000 *Annual depreciation = = \$85,000 b. Payback period = = = 3.62 years where Cost of investment Annual net cash flow \$520,000 \$235,000 \$520,000 - \$10,000 6 Cost of investment Annual net cash flow \$380,000 \$105,000

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Annual after-tax income. .............................................................. \$ 60,000
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## BUS340_ch25_assign-1_1_ -...

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