Question

A company is considering a capital investment of $16,000 in new equipment which will improve production and increase cash flows for the next five years at the following amounts: year 1: $8,000; year 2: $6,000; year 3: $5,000; year 4: $6,000; year 5: $5,000. the payback period is years.

Answer 1

Based on the cost of the capital investment in the new equipment and the cash flows for the next five years, the payback period is 2.4 years.

What is the payback period?

The payback period can be found by the formula:

= Year before payback + Amount remaining to be paid / Cashflow in year of payback

The year before payback can be inferred to be the Second year because $14,000 would have come in.

The remaining amount is:

= 16,000 - 14,000

= $2,000

Payback period is:

= 2 + 2,000 / 5,000

= 2.4 years.

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