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:

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.