Question

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 $1350. The town estimates that the new system will create an annual cash flow of $203 to be received at the end of each year, beginning in one year, for 9 consecutive years. And, in addition, the project will produce a terminal cash flow in year 10 of $303. What is the payback, in years, of the computer package?

Answer 1

Solution :

The payback period of the computer package is 6.65 years.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

07.11.2019 - Microsoft Excel DES FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW А в F Statement showing calculation of Payback period of the project Sl.No. Particulars Year Project Cash Flows Cumulative cash flows 1 Annual Cash Flow Year 1 / 1 203.00 $ 203.00 2 Annual Cash Flow Year 2 2 203.00 $ 406.00 3 Annual Cash Flow Year 3 203.00 $ 609.00 4 Annual Cash Flow Year 4 203.00 $ 812.00 5 Annual Cash Flow Year 5 203.00 $ 1,015.00 6 Annual Cash Flow Year 6 203.00 $ 1,218.00 7 Annual Cash Flow Year 7 203.00 $ 1,421.00 8 Annual Cash Flow Year 8 / 8 $ 203.00 $ 1,624.00 9 Annual Cash Flow Year 9 9 $ 203.00 $ 1,827.00 10 Terminal Cash Flow Year 10 10 $ 303.00 $ 2,130.00 Payback Period: The Payback period lies between the year 6 & 7 as the Initial Investment of $1,350 is earned during the year 7 Hence Payback period = 6 years +[($ 1,350 - $ 1,218) / $ 203] = 6 +[ 132 / 203 ] = 6 +0.6502 = 6.6502 years; = 6.65 years