Question

Builtrite has estimated their cost of capital is 14% and they are considering the purchase of a machine with the following capital budget:

Initial Investment	$62,000
RATFCF Year 1	$38,000
RATFCF Year 2	$30,000
RATFCF Year 3	$24,000

What is the machine’s payback period?     

		A.2.79 years
		B.1.2 years
		C.1.8 years
		D.2.21 years

Answer 1

STATEMENT OF CASH FLOWS

particulars year amount($) PVF@ 14% DCF cummulative

  

RATFCF 1 38000 0.877 33326 33326

RATFCF 2 30000 0.769 23070 56396

RATFCF 3 24000 0.675 16200 72596

Pay back period

Initial investment of $62000 will be payable between the year 2 & 3 ,hence the payback period on time proportion period us as under-

72596-56396=16200 for 12 months

year2------------------------------------------------------------------------------------------->year3

56396 initial investment=62000 72596

proportionate time period for earning (62000-56396)=5604

=5604/16200*12

=4.15 months

so as per me , the payback period comes out to be 2 years 4 months & 15 days