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15 November, 16:10

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. What is the payback period for this investment?

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  1. 15 November, 16:14
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    payback period = 4.86 years

    Explanation:

    given data

    cash flows year 1 = $30,000 per year

    cash flows year 5 = $35,000 per year

    cash flows year 10 = $40,000 per year

    investment cost = $150,000

    to find out

    payback period for this investment

    solution

    we get here accumulated inflows will be

    accumulated inflows year 4 = $30,000 * 4

    accumulated inflows year 4 = $120,000

    and

    accumulated inflows year 5 = $120,000 + $35,000 = $155,000

    and Initial investment = $150,000

    so payback period will be

    payback period = 4 years + (150,000 - 120,000) : 35,000 * 365 days

    payback period = 4 years and 313 days

    payback period = 4.86 years
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