Exercise 11-1 Payback Method [LO11-1] The management of Unter Corporation, an ar

Question

Exercise 11-1 Payback Method [LO11-1] The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year 2 4 Investment Cash Inflow $4,000 $8,000 $9,000 $10,000 $13,000 $11,000 $14,000 $12,000 $11,000 $11,000 $69,000 $9,000 10 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 0

Explanation / Answer

1. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 7 + ( 9,000 / 12,000)

= 7.75

= 7.8 Years

hence the correct answer is 7.8 Years

2. The correct answer is No.

This is because the payback period is 7.8years and the cash inflows are taking place till the 10th years. hecne the cash flow changes in the last year would not be included in the calculation of the payback period.

Year Investment Cash Inflow Net Cash Flow 1 -69,000 4,000 -65,000 (Investment + Cash Inflow) 2 -9,000 8,000 -66,000 (Net cash Flow +Investment + Cash Inflow) 3 -    9,000 -57,000 (Net Cash Flow + Cash Inflow) 4 -    10,000 -47,000 (Net Cash Flow + Cash Inflow) 5 -    13,000 -34,000 (Net Cash Flow + Cash Inflow) 6 -    11,000 -23,000 (Net Cash Flow + Cash Inflow) 7 -    14,000 -9,000 (Net Cash Flow + Cash Inflow) 8 -    12,000 3,000 (Net Cash Flow + Cash Inflow) 9 -    11,000 14,000 (Net Cash Flow + Cash Inflow) 10 -    11,000 25,000 (Net Cash Flow + Cash Inflow)

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