Question

4 Exercise 24-1 Payback period computation; uneven cash flows LO P1 Beyer Company is considering the purchase of an asset for $230,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. 5 points Year 1 $53,000 Year 2 $35,000 Year 3 $64,000 Year 4 $ 150,000 Net cash flows Year 5 $26,000 Total $328,000 eBook Hint 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.) Print References Year Cash inflow (Outflow) Cumulative Net Cash Inflow (Outflow) 0 $ (230,000) 1 2 3 4 5 Payback period =

Answer 1

Ans :3.52 years

Explanation is as follows

A B с D E F (in $) 1 2 3 4. 5 6 computation of of payback period Cumulative Cash in flow cash Inflow Year (outflow) (outflow) 0 -230000 -230000 53000 -177000 35000 -142000 64000 -78000 150000 72000 5 26000 98000 1 N 7 3 4 8 9 10 11 Payback Period 3.52 years 12

pay back period is the time the business takes to recover its capital ( initial cash outflow)

In the given case Given initial cash out flow =$230000

since till 3rd year we have negative cash out flow , it means till 3rd year we have outflow ($230000) more than cumulative inflows till that year ($53000+$35000 +$64000=$152000)

so we have recovered $152000 in 3 years and the balance ($78000) was recovered in 4th year out of cash inflows in that year

So formula for

payback period=

year in which last negative cumulative cash flow has come - (cumulative cash inflow for that last year /succeeding yearcash inflow)

Year in which  last negative cumulative cash flow has come=3rd year

cumulative cash inflow for that last year =$78000

Succeeding year cash inflow ( 4th year )=$150000

Therefore

payback period=

year in which last negative cumulative cash flow has come - (cumulative cash inflow for that last year /succeeding yearcash inflow)

=3-(-$78000/$150000)

=3-(-0.52)

=3.52 years

Reference working will be as follows

A B C D E F 1 (in $) 2 computation of of payback period 3 year Cumulative cash In flow (outflow) =+D4 4 0 5 1 2 Cash in flow (outflow) -230000 53000 35000 64000 150000 26000 3 6 7 8 9 10 11. 12 =+E4+D5 =+E5+D6 =+E6+D7 =+E7+D8 =+E8+D9 4 5 Payback Period =+C7-1E7/08)