Exercise 25-1 Payback period computation; uneven cash flows LO P1

Beyer Company is considering the purchase of an asset for $360,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Net cash flows

$

80,000

$

50,000

$

70,000

$

250,000

$

13,000

$

463,000

Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your answers to 2 decimal places.)

A machine can be purchased for $210,000 and used for 5 years, yielding the following net incomes. In projecting net incomes, double-declining balance depreciation is applied, using a 5-year life and a zero salvage value.

Year 1

Year 2

Year 3

Year 4

Year 5

Net incomes

$

13,000

$

28,000

$

53,000

$

40,500

$

103,000

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

Exercise 25-3 Payback period computation; even cash flows LO P1

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

a.

A new operating system for an existing machine is expected to cost $240,000 and have a useful life of four years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.

b.

A machine costs $180,000, has a $13,000 salvage value, is expected to last seven years, and will generate an after-tax income of $38,000 per year after straight-line depreciation.

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