Question

Matthew Corporation is adding a new product line that will require an investment of $ 135 comma 000. The product line is estimated to generate cash inflows of $ 25 comma 000 the first​ year, $ 20 comma 000 the second​ year, and $ 15 comma 000 each year thereafter for ten more years. What is the payback​ period?

Answer 1

The payback period for the new product line is 6 years.

Step-by-step explanation:

The payback period is the time it takes for the cash inflows from an investment to equal the initial investment cost. To calculate the payback period, we need to determine when the cumulative cash inflows equal or exceed the initial investment.

In this case, the initial investment is $135,000, and the cash inflows are $25,000 in the first year, $20,000 in the second year, and $15,000 each year thereafter for ten more years.

To find the payback period, we add up the cash inflows until they equal or exceed the initial investment. In this case, it would take 6 years to reach a cumulative cash inflow of $135,000.

Answer 2

8 years

Step-by-step explanation:

payback period the Time duration in which a project pays back the initial investment to the business in the form of cash flows.

Initial Investment = $135,000

First 2 years have variable cash flows

Recovered in first two years = $25,000 + $20,000 = $45,000

Remaining Balance after 2 years = 135,000 - $45,000 = $90,000

After 2 years there is is constant cash flow of $15,000

Pay back years for $90,000 = $90,000 / $15,000 = 6 years

Total Payback period = 2 years + 6 years = 8 years