Question

You are considering an investment which has the following cash flows. If you require a 4 year payback period, should you take the investment? Year 0 1 2 3 4 5 6 Cash Flow –$70,000 $10,000 20000 25000 40000 40000 20000 Yes, the payback is 1.000 years. Yes, the payback is 2.675 years. Yes, the payback is 3.375 years. No, the payback is 4.125 years. No, the payback is 5.500 years.

Answer 1

Answer:

Yes, the payback is 3.375 years

Explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $70,000

In year 1 = $10,000

In year 2 = $20,000

In year 3 = $25,000

In year 4 = $40,000

In year 5 = $40,000

In year 6 = $20,000

If we sum the first 3 year cash inflows than it would be $55,000

Now we deduct the $55,000 from the $70,000 , so the amount would be $15,000 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $40,000

So, the payback period equal to

= 3 years + $15,000 ÷ $40,000

= 3.375 yeas

In  3.375 yeas, the invested amount is recovered.