Question

Exercise 12-1 Payback Method [LO12-1] The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 15,000 $ 1,000 2 $ 8,000 $ 2,000 3 $ 2,500 4 $ 4,000 5 $ 5,000 6 $ 6,000 7 $ 5,000 8 $ 4,000 9 $ 3,000 10 $ 2,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in

Answer 1

Question Completion:

Requirement #2 would the payback period be affected if the cash inflow in the last year were several times as large

Answer:

Unter Corporation

1. Payback period of the investment is:

= 7 years.

2. No. The payback period would not be affected if the cash inflow in the last year were several times as large.  The payback period was reached in the 7th year, which is three years before the last year. No cash inflows after the 7th year will have any impact on the payback period.

Explanation:

a) Data and Calculations:

Cash flows:

Year  Investment  Cash Inflow

1       $ 15,000           $ 1,000

2       $ 8,000          $ 2,000

3                              $ 2,500    

4                              $ 4,000

5                              $ 5,000

6                              $ 6,000

7                              $ 5,000   $25,500

8                              $ 4,000

9                              $ 3,000

10                            $ 2,000

Total  $23,000     $34,500