Using a required rate of return of 12%. Perpetual Power Machine Co. - Purchase of a...
Using a required rate of return of 12%.
| Perpetual Power Machine Co. - Purchase of a New High Machining Tool | |
| Year | Cash Flow |
| Year 1 | $500 |
| Year 2 | 500 |
| Year 3 | 3,000 |
| Year 4 | 3,000 |
| Year 5 | 10,000 |
What is this project's payback period if initial capital investment
is $7,500?
Select one:
a. 4 years 2 months
b. 3 years 3 months
c. 5 years
d. 9 years
How to do this question? Please show the answer step by step.
Homework Answers
| Payback period is the time period in which the initial investment is receovered | ||
| Calculation of payback period | ||
| Year | Cash flows | Cumulative cash flows |
| 0 | -7500 | -7500 |
| 1 | 500 | -7000 |
| 2 | 500 | -6500 |
| 3 | 3000 | -3500 |
| 4 | 3000 | -500 |
| 5 | 10000 | 9500 |
| Hence, payback period = 4 + 500/10,000 = 4.05 years | ||
| i.e. Around 4 years 2 months | ||
| Hence, the answer is a. |
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