Question

Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1 Year 2 Year 3 Year 4 Year 5 Total Net cash flows $ 60,000 $ 40,000 $ 70,000 $ 125,000 $ 35,000 $ 330,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

Answer 1

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.