Question

Suzanne's Cleaners is considering a project that has the following cash flow data. What is the project's payback?Year 0 1 2 3 4 5Cash flows −$1,100 $300 $310 $320 $330 $340a. 2.31 yearsb. 2.56 yearsc. 2.85 yearsd. 3.16 yearse. 3.52 years

Answer 1

Answer:

3.52 years

Explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $1,100

In year 1 = $300

In year 2 = $310

In year 3 = $320

In year 4 = $330

In year 5 = $340

If we sum the first 3 year cash inflows than it would be $930

Now we deduct the $930 from the $1,100 , so the amount would be $170 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $320

So, the payback period equal to

= 3 years + ($170 ÷ $330)

= 3.52 years

In 3.52 years, the invested amount is recovered.