Question

Albury Company is adding a new assembly line at a cost of $8.5 million. The company expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the payback period for this project (rounded to one decimal place)? A. 2.8 years B. 2.9 years C. 3.1 years D. 3.4 years

Answer 1

Sol :

Albury Company cash flows

Year	Cash flow (CF)	Cumulative CF
0	($8,500,000)	($8,500,000)
1	$2,000,000	$6,500,000
2	$3,000,000	$3,500,000
3	$4,000,000	($500,000)
4	$5,000,000	($5,500,000)

Payback period (PB) = Years before cost to recover + (remaining cost to recover / cash flow during the year)

Payback period (PB) = 2 + ($3,500,000 / $4,000,000)

Payback period = 2 + 0.875 = 2.875 or 2.9 years

Therefore payback period for this project will be 2.9 years.

Answer is B = 2.9 years.