Question

Problem 10-05 Payback

A project has an initial cost of $59,850, expected net cash inflows of $10,000 per year for 9 years, and a cost of capital of 11%. What is the project's payback period? Round your answer to two decimal places.

Please show your work not just the answer, I do not understand how to calculate these problems

Answer 1

Payback period is computed as follows:

The cumulative cash inflow from year 1 till year 5 will be as follows:

= $ 10,000 x 5

= $ 50,000

The cumulative cash inflow from year 1 till year 6 is computed as follows:

= $ 10,000 x 6

= $ 60,000

As can be seen, that the initial investment of $ 59,850 is recovered between year 5 and year 6, which further implies that the payback period lies between year 5 and year 6 and is computed as follows:

= 5 years + Amount of investment to be recovered / Year 6 cash inflow

= 5 years + ( $ 59,850 - $ 50,000) / $ 10,000

= 5.99 years Approximately

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