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
Characteristics of capital budgeting include: (Check all that apply.)

a. High risk investments
b. Long-term planning
c. Large cash investment

Answer 1

Answer:

PAYBACK PERIOD

Year        Cashflow       Cummulative cashflow

                     $                           $

 0            (16,000)               (16,000)

  1             8,000                  (8,000)

  2            6,000                  (2,000)

  3            5,000                   3000

  4            6,000

  5            5,000

Payback period

= 2 years + 2,000/5,000

= 2.4 years

Explanation:

In this case, we need to deduct the initial outlay from the cashflows for each year until the initial outlay is fully recovered.