Question

Simply Hardware is adding a new product line that will require an investment of $1,530,000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $300,000 the first​ year, $295,000 the second​ year, and $235,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period.

First enter the​ formula, then calculate the payback period. ​(Round your answer to two decimal​ places.)

+ (

/

) =

Payback

Answer 1

Answer: 5.89 years

Working:

Payback period is number of years it takes to return the Initial investment

Year	Cash Inflow	Cumulative Net cash flow
0	(1,530,000)	(1,530,000)
1	300000	(1,210,000)
2	295000	(915,000)
3	235000	(680,000)
4	235000	(445,000)
5	235000	(210,000)
6	235000	25,000
7	235000	260,000
8	235000	495,000
9	235000	730,000
10	235000	965,000

Looking at the cumulative cash inflow it is clear that Payback period is between 5^th and 6^th year.

Payback period:

=Years before full recovery + (Unrecovered investment at start of the year/Cash flow during the year)

=5 years+ 210,000/235,000

=5+ 0.89 = 5.89 years