Question

Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Net cash flows Year 1 $60,000 Year 2 $40,000 Year 3 $70,000 Year 4 $125,000 Year 5 $35,000 Total $330,000 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.) Year Cash Inflow (Outflow) Cumulative Net Cash Inflow (Outflow) 0 $ (180,000) Payback period =

Answer 1

Year	Cash Inflow (Outflow)	Cumulative Net Cash Inflow (Outflow)
0	-180000	-1,80,000.00
1	60,000.00	-1,20,000
2	40,000.00	-80,000
3	70,000.00	-10,000
4	1,25,000.00	1,15,000
5	35,000.00	1,50,000
	Payback Period =	3.08	Years

Notes:

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3 + (10000/125,000)

= 3.08 years

Year	Investment	Cash Inflow	Net Cash Flow
0	-1,80,000.00	-	-1,80,000.00	(Investment + Cash Inflow)
1	-	60,000.00	-1,20,000.00	(Net Cash Flow + Cash Inflow)
2	-	40,000.00	-80,000.00	(Net Cash Flow + Cash Inflow)
3	-	70,000.00	-10,000.00	(Net Cash Flow + Cash Inflow)
4	-	1,25,000.00	1,15,000.00	(Net Cash Flow + Cash Inflow)
5	-	35,000.00	1,50,000.00	(Net Cash Flow + Cash Inflow)