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?
Solution 1:
| Computation of cumulative Net Cash flow | ||||
| Year | Cash Outflow | Cash Inflow | Net Cash Flow | Cumulative Net Cash Flow |
| 1 | $75,000.00 | $6,000.00 | -$69,000.00 | -$69,000.00 |
| 2 | $7,000.00 | $12,000.00 | $5,000.00 | -$64,000.00 |
| 3 | $18,000.00 | $18,000.00 | -$46,000.00 | |
| 4 | $17,000.00 | $17,000.00 | -$29,000.00 | |
| 5 | $20,000.00 | $20,000.00 | -$9,000.00 | |
| 6 | $18,000.00 | $18,000.00 | $9,000.00 | |
| 7 | $16,000.00 | $16,000.00 | $25,000.00 | |
| 8 | $14,000.00 | $14,000.00 | $39,000.00 | |
| 9 | $10,000.00 | $10,000.00 | $49,000.00 | |
| 10 | $13,000.00 | $13,000.00 | $62,000.00 | |
Refer above table, company is able to recover all of its investment between year 5 and 6
Now
Payback period = 5 year + $9,000 / $18,000 = 5.5 years
Solution 2:
No, payback period will not be affected if the cash inflow in the last year were several times as large because Payback period is considered only that period upto which company recover all of its investment.
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