Question

he management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 58,000 $ 4,000 2 $ 8,000 $ 8,000 3 $ 11,000 4 $ 14,000 5 $ 17,000 6 $ 15,000 7 $ 13,000 8 $ 11,000 9 $ 10,000 10 $ 10,000(1) Determine the payback period of the investment. (2) Would the payback period be affected if the cash inflow in the last year were several times as large?

Answer 1

1. 5.8 years

2. No

Step-by-step explanation:

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

In year 0 = $58,000 + $8,000 = $66,000

In year 1 = $4,000

In year 2 = $8,000

In year 3 = $11,000

In year 4 = $14,000

In year 5 = $17,000

In year 6 = $15,000

and so on

If we sum the first 5 year cash inflows than it would be $54,000

Now we deduct the $54,000 from the $66,000 , so the amount would be $12,000 as if we added the sixth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $`15,000

So, the payback period equal to

= 5 years + $12,000 ÷ $15,000

= 5.8 yeas

In 5.8 yeas, the invested amount is recovered.

2, No, it does not affect the last year cash flow as the full amount is recovered in 5.8 years