Disadvantages of these methods Quick Check . Payback is "short-sighted" . The Jackson Company has invested in a machine that -Ignores cashflow occurring after pay back cost $70,000, that has a useful life of seven years, and However, commonly used as a "double check" that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line . Simple rate of return is accounting based method, based on its useful life. It will have a Not a cash flow method payback period of four years. Given these data, the incorporates non-cash costs such as depreciation simple rate of return on the machine is closest to: -Not as useful for uneven projects because the a) 7.1% simple rate of return will fluctuate b) 8.2% c) 10.7% . Both methods ignore time value of money d) 39.3% 27 28 Quick Check The Jackson Company has invested in a machine that cost $70,000, that has a useful life of seven years, and that has no salvage value at * Depreciation in NPV the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the . Notice that, as an accounting expense, machine is closest to: depreciation is included in the calculation a) 7.1% Hints b) 8.2% of simple rate of return We are looking for the sunple return - income/initial c) 10.7% investment, but we need to do some "detective work" first . However, it is not included in NPV calcs d 39.3% . The initial investment is $70K, that is simple enough(!) But what about the income? Well... , the income is the It is not a current cash outflow. cash flow minus non-cash expense, ie. depreciation So first, get the cash flow from the payback period of 4 Discounted cash flow methods automatically years (Le. it takes 4 years to pay back the initial * provide for a return of the original investment investment of $70K in cash) Then calculate the deprecation using the useful life of 7 BUT depreciation is tax deductible years and the cost of $70K * As noted, Income is cash flow less the depreciation 30 29