Question

Cullumber Specialties just purchased inventory-management computer software at a cost of $1,440,950. Cost savings from the investment over the next six years will produce the following cash flow stream: $128,340, $258,240, $432,600, $435,250, $794,320, and $649,740. What is the payback period on this investment?

Answer 1

4.23 years

Step-by-step explanation:

The computation of the payback period is shown below:

The Investment made is $1,440,950

The Cumulative cash flow in Year 2 is

= $128.340 + $258,240

= $386.580

For Year 3

= $128,340 + $258,240 + $432,600

= $819,180

For Year 4

= $128,340 + $258,240 + $432,600 + $435,250

= $1,254,430

Now

Investment amount for recovering

= $1,440,950 - $1,254,430

= $186,520

The time taken required in fifth year is '

= $186,520 ÷ $794,320

= 0.23

And, finally

Total payback period = 4 + 0.23

= 4.23 years