Question

Beyer Company is considering the purchase of an asset for $380,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year.

	Year 1				Year 2				Year 3				Year 4				Year 5				Total
Net cash flows		$	90,000			$	50,000			$	70,000			$	250,000			$	11,000			$	471,000

Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

Year	Cash inflow (Outflow)	Cumulative Net Cash Inflow (Outflow)
0	$(380,000)
1	90,000
2	50,000
3	70,000
4	250,000
5	11,000
Payback period =		3.68	years

  

Answer 1

Payback period = A + (B/C)

   A = Year up to which cumulative cash flow are negative

   B = Cumulative cash flow in period in A

    C= cash flow of immediately year succeeding the period in A

year	cash flow $	cumulative Net cash inflow (Outflow) $
0	(380,000)	(380,000)
1	90,000	(290,000)
2	50,000	(240,000)
3	70,000	(170,000)
4	250,000	80,000
5	11,000	91,000

Pay back period = 3 + (170,000 / 250,000 )

                           = 3 + 68

So pay back period=3.68years