Payback and bailout analysis Dr. Kuttmore plans to buy a new electroencephalograph (EEG). The equipment costs $26,800, has a 6-year useful life, and has a salvage value of $3,600. A sales tax of 5 percent must be paid on the purchase. Freight and installation charges amount to $720. The doctor uses sum-of-the-years'-digits depreciation on equipment.

The doctor estimates that the machine can be used to provide treatments to 10 patients per month at a net cash inflow of $65 per patient. If the equipment is not used enough, however, the doctor would probably sell it. Estimates of the market value of the equipment at the end of each year of its life would be its book value using sum-of-the-years'-digits depreciation.

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REQUIRED a. Compute the payback period on the equipment. b. Compute the bailout on the equipment.