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4 November, 11:05

Exercise 24-1 Payback period computation; uneven cash flows LO P1 Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1 Year 2 Year 3 Year 4 Year 5 Total Net cash flows $ 60,000 $ 40,000 $ 70,000 $ 125,000 $ 35,000 $ 330,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

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  1. 4 November, 11:30
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    3.08 years

    Explanation:

    The computation of payback period is shown below:-

    Payback period = Year up to which cumulative cash flow are negative + (Cumulative cash flow in period in A : cash flow of immediately year succeeding the period in A)

    Year Cash flow cumulative cash flow

    0 ($180,000) ($180,000)

    1 $60,000 ($120,000)

    ($180,000 - $60,000)

    2 $40,000 ($80,000)

    ($120,000 - $40,000)

    3 $70,000 ($10,000)

    ($80,000 - $70,000)

    4 $125,000 $115,000

    (it will be end here because it excess from here)

    Now we will put it into formula

    Pay back period = 3 + (10,000 : 125,000)

    = 3 + 0.08

    = 3.08 years
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