Question

Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1Year 2Year 3Year 4Year 5TotalNet cash flows $60,000 $40,000 $70,000 $125,000 $35,000 $330,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

Answer 1

Answer:

Payback equals 3.08 years

Explanation:

Year    Annual Cash-flow       Cumulative cash-flow

0               ($180,000)              ($180,000)

1                 $60,000             ($120,000)

2                $40,000              ($80,000)

3                $70,000               ($10,000)

4                 $125,000                $115,000  

5                 $35,000                $150,000  

$Payback period = A + \frac{B}{C}$

Where,

A is the last period number with a negative cumulative cash flow;

B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and

C is the total cash-inflow during the period following period A

therefore $Payback period = 3 + \frac{10,000}{125,000}$ = 3.08 years