Question

Gibson Hardware is adding a new product line that will require an investment of $ 1 comma 520 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 325 comma 000 the first​ year, $ 270 comma 000 the second​ year, and $ 235 comma 000 each year thereafter for eight years. The investment has no residual value. Compute the payback period. First enter the​ formula, then calculate the payback period. ​(Round your answer to two decimal​ places.) ▼ + ( / ) = Payback

Answer 1

payback period is 5 years, 11 months

Step-by-step explanation:

Payback Period is the length of time for the Total Cash flows to equal the initial capital Investment

Cash Flows Project

Year 0 (1,520,000)

Year 1 325,000

Year 2 270,000

Year 3 235,000

Year 4 235,000

Year 5 235,000

Calculation of years

Payback period = 5 years (Total inflows are 1,300,000)

Calculation of months

Payback period = Remaining Amount/Net Cash flow in Next Month × 12

= (1,520,000-1,300,000)/235,000 × 12

= 220,000/235,000 × 12

= 11

Therefore payback period is 5 years 11 months