Question

Beyer Company is considering the purchase of an asset for $300,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year Year 1 Year 2 Year 3 Year 4 Year 5 Total $472,000 Net cash flows $76,000 $45,000 $75,000 $260,000 $16,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.) Cumulative Net Cash Inflow Cash inflow Year (Outflow) (Outflow) 0 (300,000) 1 3 4 5 Payback period

Answer 1

Solution

Year	Net Cash Flow	Cumulative Net Cash inflow (outflow)
0	$       (3,00,000)	$     (3,00,000)
1	$             76,000	$     (2,24,000)
2	$             45,000	$     (1,79,000)
3	$             75,000	$     (1,04,000)
4	$          2,60,000	$       1,56,000
5	$             16,000	$       1,72,000
	Payback period	3.40 Years

Working

Payback occurs between year 3 and 4
	$ 1,04,000.00/260000	0.400
Payback period =	3.40 years