Question

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

Year	Investment	Cash Inflow
1	$42,000	$3,000
2	$ 5,000	$6,000
3		$12,000
4		$14,000
5		$16,000
6		$15,000
7		$13,000
8		$11,000
9		$10,000
10		$10,000

Required:

1. Determine the payback period of the investment. (Round your answer to 1 decimal place.)

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

	Yes
	No

Answer 1

(1)-Payback period of the investment.

Year	Cash outflow ($)	Cash inflow ($)	Cumulative net Cash flow ($)
1	-42,000	3,000	-39,000
2	-5,000	6,000	-38,000
3		12,000	-26,000
4		14,000	-12,000
5		16,000	4,000
6		15,000	19,000
7		13,000	32,000
8		11,000	43,000
9		10,000	53,000
10		10,000	63,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 4.00 Years + ($12,000 / $16,000)

= 4.00 Years + 0.75 Years

= 4.75 Years

= 4.8 Years (Rounded to 1 decimal place)

“The Payback period of the investment will be 4.8 Years”

(2)-NO. The payback period will not affected if the cash inflow in the last year were several times as larger.