Question

small accounting firm is considering the purchase of a computer software package that would greatly reduce the amount of time needed to prepare tax forms. The software costs $2150 and this expense will be incurred immediately. The firm estimates that it will save $650 of cash flow at the end of each year beginning in one year for 5 consecutive years, and also save $1788 in year 6. What is the payback on the computer package

Answer 1

Answer:

Pay back period =3 years 4 months

Explanation:

The payback period is the estimated length of time it takes cash inflow from a project to recoup the cash outflow.  

The payback period uses cash flows and not profit.  

The payback period can be determined by accumulation the cash inflow consecutively to ascertain the length of time it will take the sum to equate the initial cost.

This will be done as follows:

The sum of the cash in flows for the first three years would equal

650× 3= 1,950

The balance required to equate 2,150 would be

balance = 2150-1950 = 200

Pay back period = 3 years + (200/650)× 12 months

= 3 years  3.6months

Pay back period =3 years 4 months