Answer:
The payback period for this investment is 3.25 years.
Explanation:
Payback period: The payback period is the period in which the initial investment is recovered. It shows the duration in which the investment amount is recovered.
In this question, we use the Steps to compute the payback period which is shown below
Step 1: First we have to sum the yearly cash inflows which is equal or less than the initial investment
Step 2: After that take the difference amount in the numerator side and next year cash inflow amount in the denominator side
In mathematically,
The initial investment amount is $240,000
And if we add the three years cash inflows which equals to
= Year 1 cash inflows + Year 2 cash inflows + Year 3 cash inflows
= $100,000 + $75,000 + $55,000
= $230,000
In 3 years, the $230,000 amount is recovered
The remaining amount i.e.
initial investment - sum of three years cash flows
$240,000 - $230,000
Now take the year 4 cash inflows in the denominator side
So, the payback period is equals to
= 3 years + $10,000 ÷ $40,000
= 3 years + 0.25
= 3.25 years
Hence, the payback period for this investment is 3.25 years.
