A company is trying to decide whether to go ahead with an investment opportunity that costs $90,000. The expected incremental cash inflows are $50,000, while the expected incremental cash outflows are $32,000. What is the payback period?

Question

Hailie Riley

Business

30 August, 16:13

A company is trying to decide whether to go ahead with an investment opportunity that costs $90,000. The expected incremental cash inflows are $50,000, while the expected incremental cash outflows are $32,000. What is the payback period?

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Answers (1)

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Deja Flynn · Answer 1

The payback period for the $90000 investment is 5 years.

Explanation:

Payback period=Initial outlay/Annual net cash flow

This requires that the initial capital investment must be established, which is $90000

However, the investment gives expected incremental cash inflows of $50000 as well as outflows of $32000, as a result, annual net cash flow is $18000 ($50000-$32000)

In other words, payback period is $90000/$18000=5 years

The payback refers to number of years it takes the initial investment to be recouped. This means that any net cash inflows after 5 years are the project's return.