Beyer Company is considering the purchase of an asset for $370,000. It is expect

Question

Beyer Company is considering the purchase of an asset for $370,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1 Year 2 Year 3 Year 4Year 5 $86,000 $49,000 $70,000$300,000 $12,000 $517,000 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.) Cumulative Net Cash Inflow (Outflow) Year Cash inflow 0 (370,000) 2 4 Payback period

Explanation / Answer

Answer:-The payback period for this investment is 3.55 years.

Explanation:-

Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

When cash inflows are uneven, then calculate cumulative net cash flow for each period and

Then use the following formula for payback period:

Payback period =A+B/C

Where:-

A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Payback period =3 +($165000/$300000)

                          =3 +.55 =3.55 years

Payback period =A+B/C

Where:-

A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

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