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10 July, 02:01

Zeta Gaming Company has an opportunity to purchase a video game phone app that will cost $150,000. Zeta expects the demand for the app to start strong but to diminish as people tire of the game. The expected cash inflows are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 $60,000 $50,000 $40,000 $30,000 $20,000 If Zeta uses the cumulative approach the payback period for this investment is

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  1. 10 July, 02:17
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    Payback period for this invest = 3 years

    Explanation:

    According to the scenario, computation of the given data are as follows:

    Cost = $150,000

    So, cumulative cash flow can be calculated as follows:

    Year Cash flows Cumulative cash flows

    0 ($150,000) ($150,000)

    1 $60,000 ($90,000)

    2 $50,000 ($40,000)

    3 $40,000 $0

    4 $30,000 - $30,000

    5 $20,000 - $50,000

    As this shows in year 3 the cumulative cash flow becomes 0.

    Hence, the payback period is 3 years.

    = 3 years
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