Question

Malkind Hardware is adding a new product line that will require an investment of $ 1 comma 418 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 320 comma 000 the first​ year, $ 280 comma 000 the second​ year, and $ 240 comma 000 each year thereafter for eight years. Compute the payback period. Round to one decimal place.

Answer 1

5.4 years

Step-by-step explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $1,418,000

In year 1 = $320,000

In year 2 = $280,000

In year 3 = $240,000

In year 4 = $240,000

In year 5 = $240,000

In year 6 = $240,000

In year 7 = $240,000

In year 8 = $240,000

In year 9 = $240,000

In year 10 = $240,000

If we sum the first 5 year cash inflows than it would be $1,320,000

Now we deduct the $1,320,000 from the $1,418,000 , so the amount would be $98,000 as if we added the six year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $240,000

So, the payback period equal to

= 5 years + $98,000 ÷ $240,000

= 5.4 years

In 5.4 yeas, the invested amount is recovered.