Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
Year Investment Cash Inflow
1 15000 1000
2 8000 2000
3 2500
4 4000
5 5000
6 6000
7 5000
8 4000
9 3000
10 2000
Determine the payback period of the investment. (Round up your answer to the next whole number.)

Answer 1

Answer:

6.50 Years

Explanation:

The computation of the  payback period of the investment is shown below;

Total cash outflow is

= $15,000 + $8,000

= $23,000

Now the Cash Inflow in all 6 years is

= $1,000 + $2,000 + $2,500 + $4,000 + $5,000 + $6,000

= $20,500

Cash inflow in Year 7 is $5,000.

But Cumulative Cash flows from Year 1 to Year 7 is

= $20,500 + $5,000

= $26,500

This amount is more than Initial Investment  i.e. $23,000.

So our Payback period is between 6 & 7 years i.e.  

= 6 + ($23,000 - $20,500) ÷ 5000

= 6.50 Years