Business

Question

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

1 Answer

  • 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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