Question

How Do I solve

Gibson Hardware is adding a new product line that will require an investment of $1,520,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $305,000 the first year, $290,000 the second year, and $235,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period. First enter the formula, then calculate the payback period. (Round your answer to two decimal places.) Full years +1 Amount to complete recovery in next year I Projected cash inflow in next year )= Payback )- D years

Answer 1

Initial Investment = $1,520,000
Total cash inflow in 5 years = $305,000 + $290,000 + $235,000 + $235,000 + $235,000
= $1,300,000

Balance of Initial Investment to be recovered in 6th Year = $1,520,000 - $1,300,000 = $220,000

Payback period = Full years + Amount to be recovered in next year / Cash inflow in next year
Payback period = 5 years + ($220,000 / $235,000)
Payback period = 5 + 0.94 = 5.94 years