Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment $15,000 $ 8,000 OvoAWN Cash Inflow $1,000 $2,000 $2,500 $ 4,000 $5,000 $6,000 $5,000 $ 4,000 $3,000 $2,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the payback period of the investment. (Round your answer to 1 decimal place.) Payback period years Required 1 Required 2 >

Answer 1

Answer:-1)-The payback period of the investment approximately is 6.5 years.

Explanation- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

When cash inflows are uneven, then calculate cumulative net cash flow for each period and

Then use the following formula for payback period:

Payback period =A+B/C Where:- A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A = 6 years + ($2500/$5000) = 6.5 years

Unter Corporation
Calculation of pay back period
Year	Investment	Cash Inflows	Unrecovered Investment
	$	$	$
1	-15000	1000	14000
2	-8000	2000	20000
3		2500	17500
4		4000	13500
5		5000	8500
6		6000	2500
7		5000	0
8		4000	0
9		3000	0
10		2000	0

2)- No, the payback period will be not affected if the cash inflow in the last year were several times as large, because the investment is recovered prior to the last year, the amount of the cash inflow in the last year has no effect on the payback period.