Question

Chee Corporation has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.)

Investment required in equipment	$620,000
Annual cash inflows	$86,000
Salvage value	$0
Life of the investment	10 years
Required rate of return	6%

The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period for the investment is closest to:

Answer 1

Year	0	1	2	3	4	5	6	7	8	9	10
Investment	-620,000
Annual cash flow		86,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000
Free Cash flow	-620,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000	86,000
Cumulative Free cash Flow	-620,000	-534,000	-448,000	-362,000	-276,000	-190,000	-104,000	-18,000	68,000	154,000	240,000
Payback Period	7.21
Payback Period = Year when cash flows turn positive + Cumulative cash flow on Year 7/ Cash flow on Year 8

Discuss in case of doubt