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18 July, 03:53

A company is considering two capital investments. Each requires an initial investment of $15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. Investment B has the following expected cash flows: Year 1: $8,000; Year 2: $6,000; Year 3: $4,000; Year 4: $2,000; Total cash flows: $20,000. Calculate the payback period for Investment A.

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  1. 18 July, 03:57
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    3 years

    Explanation:

    The computation of the payback period is shown below:

    Payback period = Initial investment : Net cash flow

    where,

    Initial investment is $15,000

    And, the net cash flow would be

    = Year 1 + year 2 + year 3 + year 4

    = $5,000 + $5,000 + $5,000 + $5,000

    = $20,000

    As we see that the net cash flow is recovered in three years that means net cash flows and the initial investment are equal

    So,

    Payback period would be

    = $15,000 : $15,000

    = 3 years
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