Question

  

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

  

Year	Investment	Cash Inflow
1	$51,000	$4,000
2	$8,000	$8,000
3		$16,000
4		$17,000
5		$20,000
6		$18,000
7		$16,000
8		$14,000
9		$13,000
10		$13,000

  

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

Answer 1

1) Payback period is 4.7 Years

2) No, As in year 5 cost of project is already recovered, any change in cash inflows in last year will not affect payabck period.

Working:

Payback period is the time upto which cost of project is recovered back.
Cost of Project		=	Investment in Year 1+Investment in Year 2
		=	$       51,000	+	$       8,000
		=	$       59,000
So, payback period will be time upto which $ 59,000 is recovered back.
Year	Cash inflow		Cumulative cash inflow
1	$         4,000		$         4,000
2	$         8,000		$       12,000
3	$       16,000		$       28,000
4	$       17,000		$       45,000
5	$       20,000		$       65,000
6	$       18,000		$       83,000
7	$       16,000		$       99,000
8	$       14,000		$   1,13,000
9	$       13,000		$   1,26,000
10	$       13,000		$   1,39,000
In Year 5 cumulative cash inflow becomes more than cost of project and hence payabck period will be in year 5.
Payabck period		=	4+((59000-45000)/20000)			=	4.7 Years