Answer:
The payback period for this investment is 3.08 years.
Explanation:
Payback Period: The payback period is that period which shows that in which year or in which period, the investment amount should be recovered.
For computing the payback period, first we have to calculate the total of yearly cash flows which is equal to the initial investment. If it is not equal or less than, so difference is taken which is divided by next year cash inflows.
The formula is shown below:
= Approximate Years in which the amount is recovered + Difference ÷ Next year cash-flows
where,
Initial investment = $180,000
Year 1 cash inflow = -$60,000
Year 2 cash inflow = -$40,000
Year 3 cash inflow = -$70,000
Year 4 cash inflow = -$125,000
Year 5 cash inflow = -$35,000
Now, sum of year 1 + year 2 + year 3 cash flows = $60,000 + 40,000 + 70,000 gives the 170,000 amount
So,
In 3 year, the 170,000 amount is recovered. For accurate results we proportionate the difference with next year cash flows
In mathematically,
= 3 + (180,000 - 170,000) ÷ $125,000
= 3 + $10,000 ÷ $125,000
= 3 + 0.08
= 3.08 year.
Hence, the payback period for this investment is 3.08 years.
