Question

Landrum Corporation is considering investing in specialized equipment costing $250,000. The equipment has a useful life of 5 years and a re sidual value of $20,000. Depreciation is calculated using the straighht-line method. The expected net cash inflows from the investment are: $60,000 $90,000 $110,000 $40,000 $25,000 $325,000 Year 1 Year 2 Year 3 Year 4 Year 5 Total cash inflows Landrum Corporation's required rate of retum on investments is 14%. What is the Payback Penod of the Imvestment using accumulated cash flows

Answer 1

Ans.	Year	Cash inflows	Accumulated Cash Inflows
	1	$60,000	$60,000
	2	$90,000	$150,000
	3	$110,000	$260,000
	4	$40,000	$300,000
	5	$25,000	$325,000
	Payback period = Completed years + (Investment - Cummulative cash flow of completed year) / Cash inflow of next year
		2 + ($250,000 - $150,000) / $110,000
		2 + $100,000 / $110,000
		2 + 0.91
		2.91   years
	No. of completed years consist of the years in which the Sum of cash inflows are the nearest lower value than investment.
	Accumulated Cash Inflows = Cash inflow of current year + Sum of previous year cash inflows