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Mary has a Project with an initial cash outlay of $10,000. Her project has an initial...

Mary has a Project with an initial cash outlay of $10,000. Her project has an initial cash flow of $10,000 in year 1, followed by $1,000 each year for years 2 and 3. Use the payback method to calculate how many years it will take for each project to recoup the initial investment.

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Answer #1

The payback method is a capital budgeting method to calculate how long an investment will be paid back.

Here initial cash outlay in "year 0" = $10,000

Cash flow and cumulative cash flow will be:

Cash flow Cumulative cash flow Year 1 10000 10000 11000 2 1000 3 1000 12000

See that we are getting the cash outlay in "year 0" in the "year 1" itself.

Therefore, the payback period of this project is 1 year. That means it will take 1 year for the project to recoup the initial investment.

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