Answer:
d. 2.22 years
Explanation:
The formula to compute the payback period is shown below:
= Initial investment ÷ Net cash flow
In this question, the discount rate is given i.e 10%
The discount factor should be computed by
= 1 ÷ (1 + rate) ^ years
where,
rate is 10%
Year = 0,1,2,3,4
Discount Factor:
For Year 1 = 1 ÷ 1.10^1 = 0.9091
For Year 2 = 1 ÷ 1.10^2 = 0.8264
For Year 3 = 1 ÷ 1.10^3 = 0.7513
For Year 4 = 1 ÷ 1.10^4 = 0.6830
Yearly cash inflows:
Year 1 = Year 1 cash inflow × Present Factor of Year 1
= $525 × 0.9091
= $477.27
Year 2 = Year 2 cash inflow × Present Factor of Year 2
= $485 × 0.8264
= $400.80
Year 3 = Year 3 cash inflow × Present Factor of Year 3
= $445 × 0.7513
= $334.33
Year 4 = Year 4 cash inflow × Present Factor of Year 4
= $405 × 0.6830
= $276.62
If we sum the first 2 year cash inflows than it would be $878.03
Now we deduct the $878.03 from the $950 , so the amount would be $71.97 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 $334.33
So, the payback period equal to
= (2 years + $71.97) ÷ ($334.33)
= 2.22 yeas
In 2.22 yeas, the invested amount is recovered.
