Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 42,000 $ 3,000 2 $ 5,000 $ 6,000 3 $ 12,000 4 $ 14,000 5 $ 16,000 6 $ 15,000 7 $ 13,000 8 $ 11,000 9 $ 10,000 10 $ 10,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large

Answer 1

Answer:

Unter Corporation

1. The payback period of the investment is:

= 5 years.

2. No. The payback period would not be affected if the cash inflow in the last year were several times as large.  The payback period was reached in the 5th year, which is half-way before the last year. As it stands, no cash inflows after the 5th year will have any impact on the payback period.

Explanation:

a) Data and Calculations:

Cash flows:

Year  Investment  Cash Inflow Cumulative inflow

1       $ 42,000           $ 3,000        $3,000

2           5,000           $ 6,000          9,000

3                               $ 12,000        21,000

4                               $ 14,000       35,000

5                              $ 16,000        51,000

6                              $ 15,000        

7                              $ 13,000  

8                              $ 11,000

9                             $ 10,000

10                           $ 10,000

Total  $47,000      $110,000