Answer:
a) 3 years
b) 5 years
Explanation:
The new system requires an investment of $1,200,000
The payback period is the number of year whereas the cash inflow is equal to the total investment regardless the present value of cash inflow. It means we don't apply any rate in the calculation/
a) if the even cash flows of $400,000 per year, then the payback period is 3 years ($1,200,000 = $400,000 * 3)
b) The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000. And total cash flows in 5 years is $1,200,000 = total investment $1,200,000
The payback period in this case is 5 years.
