Question

**Pay Back Method**

What is the payback period for the following project?

Year Inflow/(Outflow)

- ($38,000)
- $ 8,000
- $ 9,000
- $ 12,000
- $ 7,000
- $ 8,000
- $ 5,000
- $ 3,000

Answer #1

Payback period is the time required for the operating cash inflows to recover the initial investment in a project.

Here, initial investment = $38000

Cumulative cash flows after year 1 = $8000

Cumulative cash flows after year 2 = $8000 + $9000 = $17000

Cumulative cash flows after year 3 = $8000 + $9000 + $12000 = $29000

Cumulative cash flows after year 4 = $8000 + $9000 + $12000 + $7000 = $36000

Cumulative cash flows after year 5 = $8000 + $9000 + $12000 + $7000 + $8000 = $44000

The cumulative cash flows reach the initial investment amount of $38000 sometime in year 5.

Therefore the payback period would be more than 4 years and less than 5 years. Steps in the calculation of payback period are given below:

**a.** Amount of cash flow in year 5 needed to
reach $38000 cumulative cash flows:

$38000 - $36000 (year 4's cumulative cash flow amount) = $2000

**b.** Percentage of year 5 until cumulative amount
of $38000 is reached:

$2000 / $8000 = 0.25

**c.** Payback period = 4 + 0.25 = 4.25 years

Pay Back Method
What is the payback period for the following project?
Year Inflow/(Outflow)
($38,000)
$ 8,000
$ 9,000
$ 12,000
$ 7,000
$ 8,000
$ 5,000
7 $ 3,000

Calculate the payback for a project with an initial investment
of $12,000 and these following csh inflows:
Year
Cash Inflow
1
$4,000
2
$3,000
3
$2,000
4
$6,000
5
$1,000
6
$7,000

7) A company uses the payback
method to evaluate capital budgeting projects. It is
currently considering projects A, B and C.
Project
A Project
B Project
C
Initial cost (cash
outflow) $10,000 $10,000 $10,000
Cash inflows:
1st
year $ 1,000 $9,000 $ 5,000
2nd year
$9,000 $1,000 $5,000
3rd year $15,000
- 0
- $35,000
a) Find the payback period for
each of the above capital budgeting projects. Label the
payback period for each project so I can see which payback period
goes with which project.
b) What two major weaknesses of
the payback method are illustrated by...

Payback period.
Given the cash flow of two projectslong dash—A and Blong
dash—and using the payback period decision model, which
project(s) do you accept and which project(s) do you reject if you
have a 3-year cutoff period for recapturing the initial cash
outflow? For payback period calculations, assume that the cash
flow is equally distributed over the year.
Cash Flow
A
B
Cost
$14,000
$90,000
Cash flow year 1
$7,000
$36,000
Cash flow year 2
$7,000
$27,000
Cash flow...

Compute the Payback period, NPV, IRR, and PI and give
accept/reject decision for the following project. The cost of
capital is 10 percent. Assume the policy payback period is 3
years.
Year
Cash Inflow (Outflow)
0
(400)
1
100
2
200
3
200
4
300

Calculating Discounted Payback- An investment project has annual
cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount
rate of 11 percent. What is the discounted payback period for these
cash flows if the initial cost is $8,000? What if the initial cost
is $12,000? What if it is $16,000?

You are considering three independent projects, Project A,
Project B and Project C. Given the following cash flow information,
calculate the payback period for each.
Year
Project A
Project B
Project C
0 (Investment)
($ 900)
($ 9,000)
( $7,000)
1
$ 600
$ 5,000
$ 2,000
2
$ 300
$ 3,000
$ 2,000
3
$ 200
$ 3,000
$ 2,000
4
$ 100
$ 3,000
$ 2,000
5
$ 500
$ 3,000
$ 2,000

QUESTION 21
Using the following project cashflows, determine the payback
period.
ICO:
$27,000
year ΔNOCFt
1
$9,000
2 $10,000
3
$9,000
4
$8,000
2.98 years
3.02 years
3.11 years
2.89 years
none of these

5 Macy's uses the Payback Period method for evaluating its
projects. The Payback Period cut-off rule is 3 years. Macys is
considering the following project: Cash Flow for Year Project A 0
-$75,000 1 $33,000 2 $36,000 3 $19,000 4 $9,000 Required: a) Should
macys accept or reject Project A why or why not?

Payback period. What are the payback
periods of projects E and F? Assume all the cash flow is evenly
spread throughout the year. If the cutoff period is 3 years,
which project(s) do youaccept?
Cash Flow E F
Cost 36,000 95,000
Cash flow year 1 9,000 9,500
Cash flow year 2 9,000 19,000
Cash flow year 3 9,000 28,500
Cash flow year 4 9,000 38,000
Cash flow year 5 9,000 0
Cash flow year 6 9,000 0

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 8 minutes ago

asked 17 minutes ago

asked 36 minutes ago

asked 47 minutes ago

asked 53 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago