Question

ayback Period Payson Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $1,200,000 and either has: Even cash flows of $400,000 per year or The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000. Required: Calculate the payback period for each case. Round your answer to one decimal place. a. years b. years

Answer 1

Answer:

a) 3 years

b) 5 years

Explanation:

The new system requires an investment of $1,200,000

The payback period is the number of year whereas the cash inflow is equal to the total investment regardless the present value of cash inflow. It means we don't apply any rate in the calculation/

a) if the even cash flows of $400,000 per year, then the payback period is 3 years ($1,200,000 = $400,000 * 3)

b) The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000. And total cash flows in 5 years is $1,200,000 = total investment $1,200,000

The payback period in this case is 5 years.