Question

Mr. J's Bagels invested in a new oven for $14,000. The oven reduced the amount of time for baking which increased production and sales for five years by the following amounts of cash inflows:

Year 1: $8,000
Year 2: $6,000
Year 3: $5,000
Year 4: $6,000
Year 5: $5,000
Required:
a. Using the averaging method, the payback period for the investment in the oven would be _____________.

Answer 1

2.3 years

Step-by-step explanation:

The payback period is the amount of time required for cash inflows generated by a project to offset its initial cash outflow. The averaging method and subtraction method are two ways used to calculate the payback period.

Since, we are to use the averaging method, which is to divide the annualized expected cash inflows into the expected initial expenditure for the asset.

First, we determine the average inflows:

average inflow = (sum of amount of cash inflows for each year )/number of years

average inflow = ($8000+$6000+$5000+$6000+$5000)/5

average inflow = $6000

Payback Period = Initial investment/ Avg Inflows

Payback Period = $14,000/$6,000 = 2.3 years

Using the averaging method, the payback period for the investment in the oven would be 2.3 years