Rico Petricelli Industries invests $960,000 in plant assets with an estimated 10year service life and no salvage value. These assets contribute $64,000 to annu
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Question
Rico Petricelli Industries invests $960,000 in plant assets with an estimated 10year service life and no salvage value. These assets contribute $64,000 to annual net income when depreciation is computed on a straightline basis. Compute the payback period and explain your computation.
1 Answer

1. User Answers anthougo
The payback period for this Rico Petricelli Industries' investment is 6 years.
Data and Calculations:
Cost of investment in plant assets =$960,000
Estimated useful life = 10 years
Estimated salvage value = $0
Annual depreciation = $96,000 ($960,000/10)
Annual net income = $64,000
Annual cash net inflow = $160,000 ($64,000 + $96,000)
Payback period = 6 years ($960,000/$160,000)
Thus, to compute the payback period as 6 years, add the annual depreciation to the annual net income to obtain the annual cash net inflow. Then divide the cash outlay ($960,000) by the product above.
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