Answer:
a. 4 years
b. 5 years
Explanation:
The payback period is the time taken for the cash inflows from an investment to equal to the initial cash outflow or amount invested. To get this, the cash inflow are deducted from the outflows until the net is zero.
Considering both expected cash flows (all amounts in $);
Period Initial out flow Inflow Balance Inflow Balance
Year 0 (1,200,000) 0 (1,200,000) 0 (1,200,000)
Year 1 300,000 (900,000) 150,000 (1,050,000)
Year 2 300,000 (600,000) 150,000 (1,050,000)
Year 3 300,000 (300,000) 400,000 (1,050,000)
Year 4 300,000 0 400,000 (1,050,000)
Year 5 100,000 (1,050,000)
From the table above, with an inflow of $300,000 yearly, the inflows would equal the total outflow in 4 years while the annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000 would make the inflows equal to the outflows in 5 years.
