Question

Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000,$720,000,$900,000, and $950,000 over the next four years. What is the payback period for this project?

a)2.13 years
b)2.11 years
c)2.12 years
d)2.10 years

Answer 1

The payback period for Binder Corp.'s new machinery investment is 2.10 years, which is when the accumulated cash flows equal the initial investment of $1,450,000.

Step-by-step explanation:

The payback period is the duration needed to recover the initial investment made in a project. To calculate the payback period for Binder Corp.'s investment in new machinery, we add up the cash flows year by year until we reach the initial investment amount of $1,450,000.

• End of Year 1: $640,000
• End of Year 2: $640,000 + $720,000 = $1,360,000
• End of Year 3: We have already recovered $1,360,000, so we need an additional $90,000 to reach the total investment of $1,450,000.

To find the exact payback time within Year 3, we divide the remaining $90,000 by the Year 3 cash flow of $900,000, giving us 0.1 (or 10% of the year). Hence, the payback period is 2 years plus 10% of the third year, which equals 2.10 years (option d).