Question

Consider an investment that costs $120,000 and has cash inflows of $25,000, $28,000, $35,000, and $45,000 for the next four years, respectively. The required return is 9%.

(Input all answers as values with no commas, with no symbols ex. no $ or %. Input all % answers as whole numbers without symbols ex. 10.03 for .1003. Input all final answers two decimal places out.)

What is the payback period?

Answer 1

Payback period represents the time period in which the initial investment in a project is recovered.

Payback period of Investment is computed as follows:

The cumulative cash inflow of year 1, 2 and 3 is computed as follows:

= $ 25,000 + $ 28,000 + $ 35,000

= $ 88,000

The cumulative cash inflow of year 1, 2, 3 and 4 is computed as follows:

= $ 25,000 + $ 28,000 + $ 35,000 + $ 45,000

= $ 133,000

It means that the initial investment of $ 120,000 is recovered between year 3 and year 4 and hence the payback period lies between year 3 and year 4 and is computed as follows:

= 3 years + Remaining investment to be recovered / Year 4 cash inflow

= 3 years + ( $ 120,000 - $ 88,000) / $ 45,000

= 3 years + 0.71

= 3.71 years Approximately

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