Question

Daphne Inc., a steel manufacturing company, is planning to buy a new plant at $1,090,000. The life of the plant is estimated to be 5 years and has cash flows of $109,000, $218,000, $327,000, $436,000, and $545,000. Calculate the payback period for the new plant.

a. 5 years
b. 2 years
c. 4 years
d. 3 years

Answer 1

The payback period is exactly 4 years.

Step-by-step explanation:

Giving the following information:

Initial investment= $1,090,000

Cf1= 109,000

Cf2= 218,000

Cf3= 327,000

Cf4= 436,000

Cf5= 545,000

The payback period is the time required to cover the initial investment:

Year 1= 109,000 - 1,090,000= -981,000

Year 2= 218,000 - 981,000= -763,000

Year 3= 327,000 - 763,000= 436,000

Year 4= 436,000 - 436,000= 0

The payback period is exactly 4 years.