The management of Unter Corporation, an architectural design firm, is considerin

Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:

Determine the payback period of the investment. (Round your answer to 1 decimal place.)

Would the payback period be affected if the cash inflow in the last year were several times as large?

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:

Year Investment Cash Inflow 1 $60,000      $2,000       2 $4,000      $4,000       3 $8,000       4 $9,000       5 $12,000       6 $10,000       7 $8,000       8 $5,000       9 $4,000       10 $4,000       Required: 1.

Determine the payback period of the investment. (Round your answer to 1 decimal place.)

Payback period years 2.

Would the payback period be affected if the cash inflow in the last year were several times as large?

Yes No

Explanation / Answer

1.

Payback period is the period in which investment can be recovered.

2.

Yes, the payback period will be affected for e.g if we assume last period cash flow is $20,000 instead of $4,000.

It gets reduce from 9.50 to 9.10 years.

Year Investment Cash Inflow Unrecovered investment 1 $     60,000.00 $ 2,000.00 $                     58,000.00 2 $       4,000.00 $ 4,000.00 $                     58,000.00 3 $ 8,000.00 $                     50,000.00 4 $ 9,000.00 $                     41,000.00 5 $ 12,000.00 $                     29,000.00 6 $ 10,000.00 $                     19,000.00 7 $ 8,000.00 $                     11,000.00 8 $ 5,000.00 $                       6,000.00 9 $ 4,000.00 $                       2,000.00 10 $ 4,000.00 $                      (2,000.00) Payback Period = 9 years + {2,000/4,000} Payback Period 9.50 years

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