Question

The Uptown Corporation has been presented with an investment opportunity which will yield end-of-year cash flows of $55,000 per year in Years 1 through 4, and $129,000 in Year 5. This investment will cost the firm $235,000 today, and the firm's cost of capital is 12 percent. What is the payback period for this investment? Round it to two

decimal places, e.g., 3.46.

Answer 1

Year	Annual CF	Cumulative CF
1	55000	55000
2	55000	110000
3	55000	165000
4	55000	220000
5	129000	349000

The required Cumulative cash infows is $235,000. At the end of 4th year, the cumulative cash inflows is $220,000. For the 5th year the annual cash inflow is $129,000. Therefore, cash inflow of $15,000 only during the 5th year will be sufficient to make the total cumulative cash inflows to be $235,000. The precise period required to earn a cash inflow of $15,000 during the 5th year can be calculated (on the assumption that the cash inflows occur evenly throughout the year) by linear interpolation i.e the payback period is 4 years + ($15,000/$129,000)= 4.12 Years