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The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 54,000 $ 4,000 2 $ 4,000 $ 8,000 3 $ 16,000 4 $ 17,000 5 $ 20,000 6 $ 18,000 7 $ 16,000 8 $ 14,000 9 $ 13,000 10 $ 13,000 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?

Respuesta :

Answer:

1. 4.65 years

2. No

Explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $58,000   ($54,000 + $4,000)

In year 1 = $4,000

In year 2 = $8,000

In year 3 = $16,000

In year 4 = $17,000

In year 5 = $20,000

In year 6 = $18,000

And so on

If we sum the first 4 year cash inflows than it would be $45,000

Now we deduct the $45,000 from the $58,000 , so the amount would be $13,000 as if we added the fifth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $20,000

So, the payback period equal to

= 4 years + $13,000 ÷ $20,000

= 4.65 yeas

In 4.65 yeas, the invested amount is recovered.  

2. No it does not affected as the initial amount is recovered in less than five year

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