Question

Minderbinder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? (Round your answer to two decimal places.)

PLEASE SHOW WORK:)

Answer 1

To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the project has created:

$640,000 + $715,250 = $1,355,250

in cash flows. The project still needs to create another:

$1,450,000 - $1,355,250 = $94,750

in cash flows. During the third year, the cash flows from the project will be $823,330. So, the payback period will be two years, plus what we still need to make divided by what we will make during the third year. The payback period is:

Payback = 2 + ($94,750  / $823,330)

Payback = 2.12 years years