Question

Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company’s management expects the machinery to produce cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years, respectively. What is the payback period?

Answer 1

The payback period for Quebec, Inc.'s machinery purchase is calculated by summing the yearly cash flows until the total investment is recovered. It is found by tracking the remaining balance after each year's cash flow is accounted for, resulting in the payback occurring during the third year.

Step-by-step explanation:

The student is asking how to calculate the payback period for an investment in machinery by Quebec, Inc. The payback period is the time it takes for a company to recover its investment through the cash flows generated by that investment.

To calculate the payback period for Quebec, Inc.'s machinery, we add up the cash flows generated each year until the total reaches the initial cost of the machinery:

After the first year, the remaining balance is $3,768,966 - $979,225 = $2,789,741. After the second year, it is $2,789,741 - $1,158,886 = $1,630,855. In the third year, the cash flow exceeds the remaining balance, so the payback occurs during this year. We calculate the exact time within the third year by dividing the remaining balance at the end of the second year by the third year's cash flow.

The exact payback period is 2 years plus ($1,630,855 divided by $1,881,497) portion of the third year.

Answer 2

2.13 years

Step-by-step explanation:

The payback period is the time taken for the net inflows from a project to equal the amount invested into that project.

Year Outflow/inflow Balance

0 ($3,768,966) ($3,768,966)

1 $979,225 ($2,789,741 )

2 $1,158,886 ($1,630,855 )

3 $1,881,497 250,642

Additional period = 250,642 /1,881,497 = 0.13

Payback period = 2.13 years