Question

24.

Baxter's Market is considering opening a new location with an initial cost of $428,700. This location is expected to generate cash flows of $132,400, $161,500, $187,800, and $201,000 in Years 1 to 4. What is the payback period?

1.31 years

2.54 years

2.72 years

1.86 years

2.31 years

Answer 1

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2 + (134,800 / 187,800)

= 2.72 years

Hence the correct answer is 2.72 years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-4,28,700	-	-4,28,700	(Investment + Cash Inflow)
1	-	1,32,400	-2,96,300	(Net Cash Flow + Cash Inflow)
2	-	1,61,500	-1,34,800	(Net Cash Flow + Cash Inflow)
3	-	1,87,800	53,000	(Net Cash Flow + Cash Inflow)
4	-	2,01,000	2,54,000	(Net Cash Flow + Cash Inflow)