Question

King Co. invests $105,000 and the following cash flows for two investments: Year Investment A Investment...

King Co. invests $105,000 and the following cash flows for two investments:

Year Investment A Investment B
1 $30,000 $40,000
2 25,000 30,000
3 20,000 35,000
4 30,000
5 4,300,000  

Calculate the payback period for investment A and B (in yrs)

Homework Answers

Answer #1

A:

Year Cash flows Cumulative Cash flows
0 (105,000) (105,000)
1 30,000 (75,000)
2 25,000 (50,000)
3 20,000 (30,000)
4 30,000 0
5 4,300,000   4,300,000  

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4 years

B:

Year Cash flows Cumulative Cash flows
0 (105,000) (105,000)
1 40,000 (65000)
2 30,000 (35,000)
3 35,000 0

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3 years

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