Question

EKG, Inc. is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively. How long will it take the firm to recover its initial investment in this project?

Answer 1

Answer:

In 5.99 years, the invested amount is recovered.

Explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $419,000

In year 1 = $0

In year 2 = $0

In year 3 = $69,000

In year 4 = $98,000

In year 5 = $109,000

In year 6 = $145,000

In year 7 = $165,000

If we sum the first 5 year cash inflows than it would be $276,000

Now we deduct the $276,000 from the $419,000 , so the amount would be $143,000 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 $145,000

So, the payback period equal to

= 5 years + $143,000 ÷ $145,000

= 5.99 years

In 5.99 years, the invested amount is recovered.