Question

"Vulcan Materials Company is considering an investment that will have an initial cost of $8,500 but is expected to produce net cash flows of $1,400, $2,300, $3,100, and $2,000 over the next four years, respectively. Determine Vulcan's payback period."

Answer 1

Answer:

3.85 years

Explanation:

The payback period is the time that a company takes to recover its initial investment. Considering an initial investment of $8,500, and that cash flows are evenly distributed within each year, the payback period can be found by:

$\begin{array}{ccc}\ year&cash\ flow&balance\\1&\ 1,400&-\ 7,100\\2&\ 2,300&-\ 4,800\\3&\ 3,100&-\ 1,700\\4&\ 2,000&\ 300\end{array}$

The payback period occurs sometime between years 3 and 4. The fraction of year 4 needed to reach payback is:

$f=\frac{\ 2,000-\ 300}{\ 2,000}\\f= 0.85$

The company needs 3 years and 0.85 of the fourth year to break even. Therefore, the payback period for Vulcan Materials Company is 3.85 years.