Question

Blue Mountain Hardware is adding a new product line that will require an investment of $1,450,000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $305,000 the first​ year, $290,000 the second​ year, and $255,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period.

Answer 1

Answer:

payback period: 5.35 years

Explanation:

the payback period will be the time at which the project pays itself

it disregard the time value of money

the formula is:

$\frac{investment}{cash \: flow} = payback$

as the fist cashflow are not regular we subtract them

1,450,000 - 305,000 - 290,000 = 855,000

and now we apply the formula

855,000 / 255,000 = 3,35294

we currently are on year 2 and we need 3.35294 more years

so the payback will occur at:

2 + 3.35 = 5.35