Question

The management of Kawneer North America is considering investing in a new facility and the following cash flows are expected to result from the investment:

Year	Cash Outflow	Cash Inflow
1	$1,895,000	$105,000
2	555,000	205,000
3		360,000
4		480,000
5		505,000
6		600,000
7		595,000
8		295,000
9		255,000
10		250,000

A. What is the payback period of this uneven cash flow? Round your answer to 2 decimal places.

years

B. Does your answer change if year 10's cash inflow changes to $500,000?

The answer for part A will not change  if the cash inflow in year 10 changes to $500,000.

Answer 1

A
Year	Cash Outflow	Cash Inflow	Net Cash flow	Cumulative Net Cash flow
1	-1895000	105000	-1790000	-1790000
2	-555000	205000	-350000	-2140000
3		360000	360000	-1780000
4		480000	480000	-1300000
5		505000	505000	-795000
6		600000	600000	-195000
7		595000	595000	400000
Payback period is in between year 6 and year 7
Payback period	6.33 years	=6+(195000/595000)

B

Payback period is not affected by cash flows occurring after initial investment is recovered

The answer for part A will not change if the cash inflow in year 10 changes to $500,000.