Question

The Zingstad Corporation is considering an investment with the following data (Ignore income taxes.): Year 1 Year 2 Year 3 Year 4 Year 5 Investment $ 32,000 $ 12,000 Cash inflow $ 8,000 $ 8,000 $ 20,000 $ 16,000 $ 16,000 Cash inflows occur evenly throughout the year. The payback period for this investment is: Multiple Choice 4.0 years 3.5 years 3.0 years 4.5 years

Answer 1

Answer:

3.5 years

Explanation:

The computation of the payback period is given below:

Given that

In year 0 = $32,000

In year 0 = $12,000

In year 1 = $8,000

In year 2 = $8,000

In year 3 = $20,000

In year 4 = $16,000

In year 5 = $16,000

Based on the above information  

Now If we add the first 3 year cash inflows then it is  $36,000

After this, we deduct the $36,000 from the $44,000  ($32,000 + $12,000) so the remaining amount would be $8,000 now if we added the fourth year cash inflow the total amount would be more than the initial investment.

Therefore, we deduct it

Now,  the next year cash inflow is $16,000

Thus, the payback period  is  

= 3 years + $8,000 ÷ $16,000

= 3.5 yeas