Question

Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project’s four years are: Col1 Expected Annual 1 2 3 4
Col2 Expected Annual Year $30,000 45,000 60,000 50,000

Col3 Cash Inflows Cash Outflows $12,000 20,000 25,000 30,000

The cash payback period isA. 3.59 years.B. 3.50 years.C. 2.37 years.D. 3.20 years

Answer 1

Answer:

Net cashflow = Cash inflow - Cash outflow

Year 1  Net cashflow = $30,000 - $12,000 = $18,000

Year 2 Net cashflow = $45,000 - $20,000 = $25,000

Year 3 Net cashflow = $60,000 - $25,000 = $35,000

Year 4 Net cashflow = $50,000 -  $20,000 = $20,000

PAYBACK PERIOD

Year     Cashflow     Cummulative cashflow

0           (88,000)            (88,000)

1             18,000              (70,000)

2             25,000            (45,000)

3             35,000             (10,000)

4             20,000             10,000

Payback period = 3 + 10,000/20,000

Payback period = 3.5 years

The correct answer is B

Explanation:

In this question, there is need to determine the annual net cashflow, which is the the difference between annual cash inflow and annual cash outflow. The payback period is calculated by deducting the initial outlay from the annual net cashflow.