Question

Young Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its five-year useful life:

Year	Cash Inflow
1	$	18,000
2	$	22,000
3	$	24,000
4	$	16,000
5	$	9,000

What is the payback period of this investment project? (Rounded to the nearest year.)

Multiple Choice

a. 2 years

b. 4 years

c. 3 years

d. 6 years

Answer 1

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3 + ( 16,000 / 16,000)

= 4 Years

hence the correct answer is b. 4 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-80,000.00	-	-80,000.00	(Investment + Cash Inflow)
1	-	18,000	-62,000.00	(Net Cash Flow + Cash Inflow)
2	-	22,000	-40,000.00	(Net Cash Flow + Cash Inflow)
3	-	24,000	-16,000.00	(Net Cash Flow + Cash Inflow)
4	-	16,000	-	(Net Cash Flow + Cash Inflow)
5	-	9,000	9,000.00	(Net Cash Flow + Cash Inflow)