Question

Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Annual Net Cash Flows Year 1 $40,000 Year 2 $40,000 Year 3 $35,000 Year 4 $35,000 Year 5 $30,000 Compute the payback period for this investment. (Round to two decimal places.)

Answer 1

Answer:

2.57 years

Explanation:

In the payback, we're calculating how many years the money spent is recovered. The formula below shows:

In year 0 = $100,000

In year 1 = $40,000

In year 2 = $40,000

In year 3 = $35,000

In year 4 = $35,000

In year 5 = $30,000

If we sum the first 2 year cash inflows than it would be $80,000

If we add the first 2-year cash inflows, it would be $80,000 Now we subtract the $80,000 from the $100,000, so the amount would be $20,000 as if we added the third-year cash inflow to the initial investment. So, we deduct it

And, the next year cash inflow is $35,000

Therefore, the payback period would be

= 2 years + $20,000 ÷ $35,000

= 2.57 years