Ribelin Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period? A. 856 years B. 10.42 years C. 10.00 years D. 11.17 years

Question

Ethan Hanson

Business

29 July, 15:41

Ribelin Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period? A. 856 years B. 10.42 years C. 10.00 years D. 11.17 years

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Answers (1)

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Mathew · Answer 1

C. Payback is 10 years

Explanation:

Payback is the number of years it will takes to recover the initial investment, which in this case translates to: how long will it take for Ribelin Corpration to recover the $218,000 investment given the stated cash-flows.

Year Cash-flow Balance

0 (218,000.00) (218,000.00)

1 32,000.00 (186,000.00)

2 18,000.00 (168,000.00)

3 21,000.00 (147,000.00)

4 21,000.00 (126,000.00)

5 21,000.00 (105,000.00)

6 21,000.00 (84,000.00)

7 21,000.00 (63,000.00)

8 21,000.00 (42,000.00)

9 21,000.00 (21,000.00)

10 21,000.00 -

11 21,000.00 21,000.00

12 21,000.00 42,000.00

By end of year 10, total inflows are exactly equal the initial investment, therefore it will take them 10 years