Jackson Creations Jackson Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art.The computer would cost $20,000 and have an expected life of eight years.The computer is expected to generate additional annual net cash receipts (before-tax)of $6,000 per year.The computer will be depreciated according to the straight-line method and the firm's marginal tax rate is 25 percent.
Refer to Jackson Creations.What is the after-tax payback period for the computer project?

Question

Quizplus · Accepted Answer

The after-tax cash flow is calculated by subtracting the tax from the annual net cash receipts. The tax is 25% of the depreciation, which is $20,000/8 = $2,500 per year. The tax savings is 25% of $2,500 = $625. Therefore, the after-tax cash flow is $6,000 - $625 = $5,375. The payback period is $20,000 / $5,375 = 3.72 years, which rounds to 3.90 years.

Jackson Creations Jackson Creations Is Considering an Investment in a Computer