Question

Dragonfly, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straightminusline method of depreciation. The following information is​ available: Investment A Investment B Initial capital investment $ 105 comma 000 $ 158 comma 000 Estimated useful life 10 years 10 years Estimated residual value 0 $ 20 comma 000 Estimated annual net cash inflow for 10 years $ 30 comma 000 $ 42 comma 000 Required rate of return 12​% 12​% Calculate the payback period for Investment A.​ (Round your answer to two decimal​ places.)

Answer 1

Answer: 3.5 years

Explanation:

Investment A:

Initial capital investment = $105,000

Estimated useful life = 10 years

Estimated residual value = 0

Estimated annual net cash inflow for 10 years = $30,000

Required rate of return = 12​%

Year                 Cash Flow                Accumulated Cash flow

  0                     -$105,000                         -$105,000

  1                        $30,000                          -$75,000

  2                       $30,000                         -$45,000

  3                        $30,000                         -$15,000

  4                        $30,000                           $15,000

   

Hence, at the end of 4th year the accumulated cash flow become positive. Therefore,

The pay back period for investment A = 3 + $\frac{15,000}{30,000}$

                                                               = 3 + 0.5

                                                               = 3.5 years