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Kisachek [45]
3 years ago
6

It will cost $2,500 to acquire an ice cream cart. Cart sales are expected to be $1,500 a year for three years. After the three y

ears, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period?
Business
1 answer:
Dvinal [7]3 years ago
3 0

Answer: 1 year and 6 months

Explanation:

The cash flows are as follows,

Year 0 = ($2,500)

Year 1 = $1,500

Year 2 = $1,500

Year 3 = $1,500

Payback period is the time it will take to break even the intial investment (In this question the initial investment is $2,500)

The sum of the cashflows of year1 and year2 is equal to $3,000

which means that the payback period is somewhere bbetween year 1 and year2

1500/3000 = 0.5 year or 6 months

the total payback period is 1 year and 6 months

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The buyer will record an increase in his inventory at this point and make provision for risk of shipping along with shipping cost.

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