Payback Period Each of the following scenarios is independent. Assume that all c

Question

Payback Period Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Colby Hepworth has just invested $450,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment. Kylie Sorensen has just invested $1,500,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $750,000, $430,000, and $320,000. Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in $960,000 per year. Rahn Booth invested $1,550,000 in a project that pays him an even amount per year for 5 years. The payback period is 2.5 years. Required: 1. What is the payback period for Colby? Round your answer to two decimal places. years 2. What is the payback period for Kylie? Round your answer to one decimal place. years 3. How much did Carsen invest in the project? $ 4. How much cash does Rahn receive each year? $ per year

Explanation / Answer

1.Payback period for colby.

sine she is receiving equal cash flows every year.

payback period = investment / cash inflows every year

=> $450,000 / 120,000

=>3.75 years.

2. pay back period for Kyile.

since the cash flows are uneven , the following table shows the back period:

initial investment to be recovered = $1,500,000.

it can be observed that 1,500,000 is recovered between 2 and 3 rd year.

now,

payback period = 2nd year + (initial investment - cumulative cash flow of year 2) / cashflow of year 3.

=>2 nd year + (1,500,000 - 840,000) / 750,000

=>2nd year + 690,000 / 750,000

=>2nd year +0.92

=>2.92 years.

3. investment of Carsen = annual cash inflows * payback period

=>$960,000 * 4 years

=>$3,840,000..

4. since we have equal annual payments,

the cash received by Rahn each year = initial investment / payback period

=>$1,550,000 / 2.5

=>$620,000.

Year Cash flow Cumulative cash flow 1 350,000 350,000 2 490,000 840,000 3 750,000 1,590,000 4 430,000 2,020,000 5 320,000 2,340,000

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