10 March, 20:32

# The Z Corporation is considering an investment with the following data (Ignore income taxes.) : Year 1 Year 2 Year 3 Year 4 Year 5 Investment \$ (32,000) \$ (12,000) Cash inflow \$ 8,000 \$ 8,000 \$ 20,000 \$ 16,000 \$ 16,000 Cash inflows occur evenly throughout the year. The payback period for this investment is:

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1. 10 March, 21:22
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3.5 yeas

Explanation:

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

In year 0 = \$32,000

In year 0 = \$12,000

In year 1 = \$8,000

In year 2 = \$8,000

In year 3 = \$20,000

In year 4 = \$16,000

In year 5 = \$16,000

If we sum the first 3 year cash inflows than it would be \$36,000

Now we deduct the \$36,000 from the \$44,000, so the amount would be \$8,000 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 \$16,000

So, the payback period equal to

= 3 years + \$8,000 : \$16,000

= 3.5 yeas

In 3.5 yeas, the invested amount is recovered.