Solution:
Payback period = Initial investment / Annual cash inflows = $101,000 / $40,000 = 2.525 years
Chart values are based on: | ||||
I = | 12% | |||
Year | Cash inflows (Outflow) | Table Factor | Present value of cash flows | Cumulative Present value of Cash inflow (Outflow) |
0 | -$101,000 | 1.00000 | -$101,000 | -$101,000 |
1 | $40,000 | 0.89286 | $35,714 | -$65,286 |
2 | $40,000 | 0.79719 | $31,888 | -$33,398 |
3 | $40,000 | 0.71178 | $28,471 | -$4,927 |
4 | $40,000 | 0.63552 | $25,421 | $20,494 |
5 | $40,000 | 0.56743 | $22,697 | $43,191 |
Calculate the portion of the year: | 3 | |||
Numerator for partial year | $4,927 | |||
Denominator for partial year | $25,421 | |||
Breakeven time = | 3.19 | Years |
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