Question

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is:

Answer 1

3.5 years

Step-by-step explanation:

Payback period calculates the amount of the time it takes to recover the amount invested from the cumulative cash flows.

The amount invested is $-90,000

In the first year , $-90,000 + $36,000 = $-54,000 is recovered

In the second year, $-54,000 + $30,000 = $-24,000 is recovered

In the third year, $-24,000 + $18,000 = $-6,000 is recovered

In the fourth year, $-6,000 + $12,000 = $6000 is recovered.

By the fourth year, the total amount invested is recovered as the cash flow turns postive

Pay back period = 3 years + $6000/$12,000 = 3.5 years

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