Question

Beyer Company is considering the purchase of an asset for $240,000. 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
Net cash flows		$	60,000			$	36,000			$	60,000			$	150,000			$	25,000			$	331,000

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 $(240,000) 1 2 3 4 5 Payback period =

Answer 1

Solution

Year	Net Cash Flow	Cumulative Net Cash inflow (outflow)
0	$         (240,000)	$      (240,000)
1	$             60,000	$      (180,000)
2	$             36,000	$      (144,000)
3	$             60,000	$         (84,000)
4	$           150,000	$           66,000
5	$             25,000	$           91,000
	Payback period	3.56 Years

Working

Payback occurs between year 2 and 3
Absolute value of cumulative cash flow at the last year having Negative cumulative cash flow	$       84,000.00	0.56
Total cash flow during the period after last year having Negative cumulative cash flow	$     150,000.00
Payback period =	3.56 years