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Exercise 11-1 Payback period computation; uneven cash flows LO P1 Beyer Company

ID: 2592696 • Letter: E

Question

Exercise 11-1 Payback period computation; uneven cash flows LO P1 Beyer Company is considering the purchase of an asset for $290,000. It is expected to produce the following net cash flows. T flows occur evenly within each year. Year 1 Year 2 $70,000 $40,000 $70,000 $200,000 $20,000 $400,000 Year 4 Total Net cash flows Compute the payback period for this investment.(Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place. Year Cash inflow Cumula Outflow) Cash Inflow Outfiow) o (290,000) Payback period .

Explanation / Answer

Year

Cash Inflow / (Outflow)

Cumulative Cash Inflow / (Outflow)

0

(290,000)

(290,000)

1

70,000

(220,000)

2

40,000

(180,000)

3

70,000

(110,000)

4

200,000

90,000

5

20,000

110,000

Payback Period = 3.55 years

Explanation

Annual Net Cash Flows

Cumulative Cash Flows

1

70,000

70,000

2

40,000

110,000

3

70,000

180,000

4

200,000

380,000

5

20,000

400,000

Part of the year = 110,000 / 200,000 = 0.55

Payback period = 3 + 0.55 = 3.55 years

Year

Cash Inflow / (Outflow)

Cumulative Cash Inflow / (Outflow)

0

(290,000)

(290,000)

1

70,000

(220,000)

2

40,000

(180,000)

3

70,000

(110,000)

4

200,000

90,000

5

20,000

110,000