Question

Matthew Corporation is adding a new product line that will require an investment of $204,000. The product line is estimated to generate cash inflows of $32,000 the first year, $25,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period? O A. 9.84 years O B. 9.37 years O c. 7.78 years O D. 9 years

Answer 1

a) Cash payback period

Year	Cash flow	Cumulative cash flow
1	32000	32000
2	25000	57000
3	21000	78000
4	21000	99000
5	21000	120000
6	21000	141000
7	21000	162000
8	21000	183000
9	21000	204000

So answer is d) 9 Years

2) Net income = 140000-(400000-25000/5) = 65000

Accounting rate of return = 65000/400000 = 16.25%

So answer is b) 16.25%