Question

The following details are provided by a manufacturing company: Product line Investment $1,100,000 Useful life 12 years Estimated annual net cash inflows for first year $400,000 Estimated annual net cash inflows for second year $390,000 Estimated annual net cash inflows for next ten years $380,000 Residual value $70,000 Depreciation method Straight-line Required rate of return 14% Calculate the payback period for the investment. (Round your answer to two decimal places.)

Answer 1

2.82 years

Step-by-step explanation:

The payback is the length of time taken for the investment's cash inflows to equal the initial investment outlay.

In the first two years of the investment, $790,000($400,000+$390,000) would have been recouped out of the initial investment of $1,100,000.

The amount that is expected to be recovered in year 3 is $310,000 ($1,100,000-$790,000), based on that , we can compute our payback period thus:

payback period=2 years+(cash flow recovery in year 3/year cash 3 inflows)

payback period=2+($310,000/$380,000)

payback period=2.82 years