Question

Lewis Manufacturing Company is planning to invest in equipment costing $240,000. The estimated cash flows from this equipment are expected to be as follows: Year Cash Inflows 1 $100,000 2 75,000 3 55,000 4 40,000 5 50,000 Total $320,000 Assume that the cash inflows occur evenly over the year. The payback period for this investment is:

Answer 1

Answer:

The payback period for this investment is 3.25 years.

Explanation:

Payback period: The payback period is the period in which the initial investment is recovered. It shows the duration in which the investment amount is recovered.

In this question, we use the Steps to compute the payback period which is shown below

Step 1: First we have to sum the yearly cash inflows which is equal or less than the initial investment

Step 2: After that take the difference amount in the numerator side and next year cash inflow amount in the denominator side

In mathematically,

The initial investment amount is $240,000

And if we add the three years cash inflows which equals to

= Year 1 cash inflows + Year 2 cash inflows + Year 3 cash inflows

= $100,000 + $75,000 + $55,000

= $230,000

In 3 years, the $230,000 amount is recovered

The remaining amount i.e.

initial investment - sum of three years cash flows

$240,000 - $230,000

Now take the year 4 cash inflows in the denominator side

So, the payback period is equals to

= 3 years + $10,000 ÷ $40,000

= 3 years + 0.25

= 3.25 years

Hence, the payback period for this investment is 3.25 years.