Question

It will cost $4,000 to acquire a small ice cream cart. Cart sales are expected to be $3,200 a year for five years. After the five years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

Answer 1

Cost = $4,000
Revenues = $3,200 per year
Life = 5 years

Payback period calculation:
Year ----- Cash flow -------- Investment
Yr 0 ----- ------------ -4,000
Yr 1 ------ 3,200 ----------- -800
Yr 2 ------ 3,200 -------------- 0

Payback period lies between year 1 and 2.

Therefore,
Payback period = 1+ 800/3200 = 1+0.25 = 1.25 years