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Suppose a company has proposed a new 4-year project. The project has an initial outlay of...

Suppose a company has proposed a new 4-year project. The project has an initial outlay of $60,000 and has expected cash flows of $15,000 in year 1, $20,000 in year 2, $29,000 in year 3, and $45,000 in year 4. The required rate of return is 13% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 1.2)

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Answer #1
Year Cash flows Cumulative Cash flows
0 (60000) (60000)
1 15000 (45000)
2 20000 (25000)
3 29000 4000
4 45000 49000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(25000/29000)

=2.9 YEARS(APPROX).

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