Question

What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4

Answer 1

Step-by-step explanation:

Payback period calculates the amount of time it takes to recover the amount invested in a project to be recovered from the cumulative cash flow.

In year 1 , the amount recovered is = $-5,000,000 + $1,800,000 = $-3,200,000

In year 2, the amount recovered is = $-3,200,000 + $1,900,000 = $-1,300,000

In year 3, the amount recovered is = $-1,300,000 + $700,000 = $-600,000

In year 4, the amount recovered is 3 + (600,000 / 1,800,000) = 3.33 years

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