Question

Payback Period Payson Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $1,200,000 and either has: a. Even cash flows of $400,000 per year or b. The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000 Required: Calculate the payback period for each case. Round your answer to one decimal place. years b. years

Answer 1

a) Equal cash inflows of $400,000 each year.

the investment to be recovered is $1,200,000.

year	Cash flow	Cumulative cash flow
1	$400,000	$400,000
2	$400,000	$400,000 +400,000 =>$800,000
3	$400,000	$800,000+400,000=>$1200,000
4	$400,000	$1200,000+400,000=>$16,00,000

SInce full investment of $1,200,00 is recovered in 3 years, we have a payback period of 3 years .

b) Uneven cash flows:

Year	Cash flow	Cumulative cash flow
1	$150,000	$150,000
2	$150,000	$300,000
3	$400,000	$300,000+400,000 =.$700,000
4	$400,000	$700,000+ 400,000 =>$1,100,000
5	$100,000	$11,000,000 +100,000 =>$1,200,000

$1,200,000 is recovered by end of 5 th year, so we have a payback period of 5 years .