Question

The management of Daytona Industries, an interior design company, is considering a R250 000 investment in a high-quality booking system with the following cash flows: Year Cash Inflow 1 R 30 000

2 R 60 000

3 R120 000

4 R130 000

5 R160 000

1.1. Determine the payback period of the investment. (Present in table format)

Answer 1

The payback period refers to the amount of time it takes to recover the cost of an investment.

Year	Cash flow	Cumulative cash flow
1	R 30,000	R 30,000
2	R 60,000	R 90,000
3	R 120,000	R 210,000
4	R 130,000	R 340,000
5	R 160,000	R 500,000

Cost of investment = R 250,000.

So the payback period will be in between 3 and 4 year because the investment of R 250,000 is in between cumulative cash flow of 3 and 4 year.

Upto 3 year, cash inflow = R 210,000.

Balance to cover = 250,000-210,000

Balance to cover = R 40,000.

Cash inflow in year 4 = 130,000.

Partial recover = 40,000/130,000

Partial recover = 0.31

So total payback period = 3 + 0. 31

Total payback period = 3.31 years.

SUMMARY:

Payback period = 3.31 years.