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

Answer:

payback period is 5 years, 11 months

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