Question

Seattle Inc. identifies an investment opportunity, which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. The initial cash outflow is $150,000, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment? (Round off the answer to two decimal places.)

Answer 1

the payback period = 4.86 years

Step-by-step explanation:

Seattle's cash flows are as following:

Year Cash flow Accumulated cash flows

0 -$150,000 -$150,000

1 $30,000 -$120,000

2 $30,000 -$90,000

3 $30,000 -$60,000

4 $30,000 -$30,000

5 $35,000 $5,000

6 $35,000 $40,000

etc.

The payback period is between year 4 and 5:

• 4 years + ($30,000 / $35,000) = 4.86 years or
• year 4 + [($30,000 / $35,000) x 365 days] = 4 years and 313 days