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A small town in Ohio is considering the purchase of a new parking system that would...

A small town in Ohio is considering the purchase of a new parking system that would enhance the collection of parking fees while providing additional convenience to shoppers. The hardware requires an immediate investment of $750. The town estimates that the new system will create an annual cash flow of $161 to be received at the end of each year, beginning in one year, for 7 consecutive years. And, in addition, the project will produce a terminal cash flow in year 8 of $261. What is the payback, in years, of the computer package?

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Answer #1
Year Cash flows Cumulative Cash flows
0 (750) (750)
1 161 (589)
2 161 (428)
3 161 (267)
4 161 (106)
5 161 55
6 161 216
7 161 377
8 261 638

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4+(106/161)

=4.66 years(Approx).

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