The following details are provided by a manufacturing company: Investment Useful

Question

The following details are provided by a manufacturing company: Investment Useful life Estimated annual net cash inflows for first year Estimated annual net cash inflows for second year Estimated annual net cash inflows for next ten years Residual value Depreciation method Required rate of return Calculate the payback period for the investment. (Round your answer to two decimal places.) Product line $1,030,000 12 years $480,000 $370,000 $250,000 $70,000 Straight- line 14% OA. 5.11 years 0 B. 2.15 years ° C. 4.72 years OD. 2.72 years

Explanation / Answer

Correct option is D

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Payback period is the time it takes for a project to return the initial capital, Payback period is different than discounted payback in which cash flows are discounted first with required rate of return/discount rate, in payback period method cash flows are not discounted.

Year

Cash Inflow

Cumulative cash flow

1

480000

480000

2

370000

850000

3

250000

1100000

Payback period will fall between year 2 and 3

Payback period will be,

= 2+ (1030000 - 850000)/250000

= 2+ (180000)/ 250000

= 2+ 0.72

= 2.72 years

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Hope that helps.

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Year

Cash Inflow

Cumulative cash flow

1

480000

480000

2

370000

850000

3

250000

1100000

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