Question

Ace Hardware is adding a new product line that will require an investment of $ 1 comma 418 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 330 comma 000 the first​ year, $ 290 comma 000 the second​ year, and $ 230 comma 000 each year thereafter for eight years. Compute the payback period. Round to one decimal place.

Answer 1

5.47 years

Step-by-step explanation:

The computation of the payback period is shown below:

In year 0 = $1,418,000

In year 1 = $330,000

In year 2 = $290,000

In year 3 = $230,000

In year 4 = $230,000

In year 5 = $230,000

In year 6 = $230,000

In year 7 = $230,000

In year 8 = $230,000

In year 9 = $230,000

In year 10 = $230,000

If we add the first 5-year cash inflows, that will be $1,310,000 So we subtract the $1,310,000 from the $1,418,000, then the balance will be $108,000 as though we applied the six-year cash inflow to the original investment, and the cumulative sum exceeds. So, we subtract it And the cash inflow next year is $230,000

So, the payback period equal to

= 5 years + $108,000 ÷ $230,000

= 5.47 years