Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 31,000 $ 2,000 2 $ 4,000 $ 4,000 3 $ 8,000 4 $ 9,000 5 $ 12,000 6 $ 10,000 7 $ 8,000 8 $ 6,000 9 $ 5,000 10 $ 5,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large?

Answer 1

Answer:

payback 5 years

if the ltaer years cash flow increases several times, it would not affect the payback date. This is a disavantage of this method, it is focus on recover the investment without considering the total cash flow of the project.

Explanation:

Payback = the time in the life of a project on which the initial ivnestment is recover.

       -31,000 Balance

Year 1  2,000 -  29,000

Year 2 0          - 29,000

Year 3 8,000  -  21,000

Year 4 9,000  -  12,000

Year 5 12,000              0

At year 5 the proejct achieve payback