Question

Payback Period

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

Colby Hepworth has just invested $500,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment. Kylie Sorensen has just invested $1,560,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $780,000, $470,000, and $310,000.

Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in $960,000 per year. Rahn Booth invested $1,450,000 in a project that pays him an even amount per year for 5 years. The payback period is 2.5 years.

1. What is the payback period for Colby? Round your answer to two decimal places. years2. What is the payback period for Kylie? Round your answer to one decimal place. years

Answer 1

Answer and Explanation:

The computation of the payback period is shown below:

a. For Colby, the payback period is

= Initial investment ÷ Annual Cash flow

= $500,000 ÷ $120,000

= 4.17 years

b. For Kylie, the payback period is

In year 0 = $1,560,000

In year 1 = $350,000

In year 2 = $490,000

In year 3 = $780,000

In year 4 = $470,000

In year 5 = $310,000

If we add the first 2 year cash inflows than it comes $840,000

Now we subtract the $840,000 from the $1,560,000 , so the amount is $720,000 as if we plus the third year cash inflow , the total amount exceed to the initial investment. Therefore, we minus it

And, the next year cash inflow is $780,000

So, the payback period equal to

= 2 years + $720,000 ÷ $780,000

= 2.92 years