Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:

Year	Investment		Cash Inflow
1	$	75,000	$	6,000
2	$	7,000	$	12,000
3			$	18,000
4			$	17,000
5			$	20,000
6			$	18,000
7			$	16,000
8			$	14,000
9			$	10,000
10			$	13,000

Required:

1. Determine the payback period of the investment.

2. Would the payback period be affected if the cash inflow in the last year were several times as large?

Answer 1

1. pay back period = 5.5 years

2. pay back period would not be affected if the cash in flow in the last year were several times as large

explanation

YEAR	INVESTMENT	CASH INFLOW	CUMULATIVE CASH INFLOW
1	$75,000	$6000	$6000
2	$7000	$12,000	$18,000
3		$18,000	$36,000
4		$17,000	$53,000
5		$20,000	$73,000
6		$18,000	91,000
7		$16,000	107,000
8		$14,000	121,000
9		$10,000	131,000
10		$13,000	144,000

PAY BACK PERIOD = 5 YEARS + unrecovered amount / amount in the 6th year

= 5 years + ($9000/18,000)

= 5 + 0.5

=5.5 years

answered by: anonymous