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11 June, 04:31

A company is considering the purchase of a new piece of equipment for $117,200. Predicted annual cash inflows from this investment are $53,000 (year 1), $21,500 (year 2), $26,500 (year 3), $20,500 (year 4) and $23,000 (year 5). The payback period is:

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  1. 11 June, 05:01
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    3.79 years

    Explanation:

    In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

    In year 0 = $117,200

    In year 1 = $53,000

    In year 2 = $21,500

    In year 3 = $26,500

    In year 4 = $20,500

    In year 5 = $23,000

    If we sum the first 3 year cash inflows than it would be $101,000

    Now we deduct the $101,000 from the $117,200, so the amount would be $16,200 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

    And, the next year cash inflow is $20,500

    So, the payback period equal to

    = 3 years + $16,200 : $20,500

    = 3.79 years

    In 3.79 years, the invested amount is recovered.
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