Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $52,000 $2,000 2 $9,000 $4,000 3 $10,000 4 $11,000 5 $14,000 6 $12,000 7 $10,000 8 $13,000 9 $12,000 10 $12,000 Required: 1. Determine the payback period of the investment. (Round your answer to 1 decimal place.) 2. Would the payback period be affected if the cash inflow in the last year were several times as large?]

Answer 1

Answer:

The payback period will be "6.8 years".

Explanation:

According to the question,

Period before full recovery,

= 6

At the starting of the year, unrecovered cost,

= 8,000

Cash flows during year,

= 10,000

Now,

The payback period will be:

= $Period \ before \ full \ recovery+\frac{Unrecovered \ cost \ at \ start \ of \ year}{Cash \ flows \ during \ year}$

= $6+\frac{8000}{10000}$

= $6+0.8$

= $6.8 \ years$