Question

Joe's hardware is adding a new product line that will require and investment of $1,530,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $330,000 the first year, $275,000 the second year, and $245,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period.

Answer 1

Year	Cash flows	Cumulative Cash flows
0	(1,530,000)	(1,530,000)
1	330,000	(1,200,000)
2	275000	(925000)
3	245000	(680,000)
4	245000	435000)
5	245000	(190,000)
6	245000	55000
7	245000	300,000
8	245000	545000
9	245000	790,000
10	245000	1,035,000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=5+(190,000/245000)

=5.78 years(Approx).