Question

Richol Corporation is considering an investment in new equipment costing $180,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year, $65,000 the second year, and $90,000 every year thereafter until the fifth year. What is the payback period for this investment? The equipment has no residual value.

		2.37 years
		2.00 years
		2.78 years
		4.00 years

Answer 1

Ans.	Option 3rd 2.78 years
	Year	Cash inflows	Cummulative Cash Inflows
	1	$45,000	$45,000
	2	$65,000	$110,000
	3	$90,000	$200,000
	4	$90,000	$290,000
	5	$90,000	$380,000
	Full years + (Amount to complete recovery in next year / Projected cash inflow in next year) = Payback period
		2 + ($70,000 / $90,000)
		2 + 0.78
		2.78   years
	*Explanations:
	*Full years consist of the years in which the Sum of cash inflows are the nearest lower value than investment.
	*Cummulative Cash Inflows = Cash inflow of current year + Sum of previous year cash inflows
	*Amount to complete recovery in next year = Investment - Cummulative cash flow of full years
			$180,000 - $110,000
			$70,000