Question

Exercise 11-1 Payback period computation; uneven cash flows LO P1

Beyer Company is considering the purchase of an asset for $290,000. 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 $ 70,000 $ 40,000 $ 70,000 $ 200,000 $ 20,000 $ 400,000 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.)

Answer 1

Payback period refers to the time in which initial investment in the project is recovered.

Payback period = A + B/C

Where,

A = years of full recovery

B = Uncovered cost at the beginning of the last year

C = Cash flows in the following year

Payback period = Cost of machine/Annual cash inflow

year	Cash inflow	cumulative cash inflow
1	70,000	70,000
2	40,000	110,000
3	70,000	180,000
4	200,000	380,000
5	20,000	400,000

Payback period = 3 + 110,000/200,000

= 3 + 0.55

= 3.55 years

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