Question

Year system 1 system 2 0 -15000 -45000 1 15000 32000 2 15000 32000 3 15000...

Year system 1 system 2
0 -15000 -45000
1 15000 32000
2 15000 32000
3 15000 32000

Payback: what are the payback periods for production systems 1 and 2? If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest?

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Answer #1

Payback period = initial investment/net annual cash inflows

The above formula is for even(same) cash inflows every year(period).

In our question cash inflows in every year is even (same).

Production Sytem 1 = 15,000/15,000 = 1 year

Production System 2 =45,000/32,000 = 1.40625 years

As the payback period is lowest in production system 1 ,the firm should invest in priduction system 1.

Note ÷ As nothing said for rounding off the figures, the figures are not rounded off.

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