An investment project provides cash inflows of $1,100 per year for eight years. a.What is the project payback period if the initial cost is $3,750? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)b.What is the project payback period if the initial cost is $4,800? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)c.What is the project payback period if the initial cost is $9,800? (Enter 0 if the project never pays back. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Payback period is a technique used in Capital budgeting to calculate the time taken by an investment or a project to recover its initial cost. It helps to determine whether a project or an investment should be accepted or rejected. The project with shorter payback period is considered to be desirable. It is calculated as follows- Payback period=Years before full recovery+Unrecovered cost at the start of the yearCash flow during the year Year Cash flow Cumulative cash flow 1 $1,100 $1,100 2 $1,100 ($1,100+$1,100) = $2,200 3 $1,100 ($2,200+$1,100) =$3,300 4 $1,100 ($3,300+$1,100) = $4,400 5 $1,100 ($4,400+$1,100) = $5,500 6 $1,100 ($5,500+$1,100) = $6,600 7 $1,100 ($6,600+$1,100) = $7,700 8 $1,100 ($7,700+$1,100) = $8,800From the cumulative cash flows column in the table, we can say that the cost of $3,300 out of the total cost is recovered in the year 3. The remaining cost will be recovered in Year 4 i.e. full cost will be recovered in the Year 4. Therefore, Years before full recovery: 3 years Unrecovered cost at the start of the year: $450 (i.e. $3,750-$3,300) Cash flow during the year of full recovery: $1,100 (in year 4) Substituting these values in the Payback period formula, we get- Payback period=3+$450$1,100 =3+0.40909Payback period=3.41 yearsFrom the cumulative cash flows column in the table, we can say that the cost of $4,400 out of the total cost is recovered in the year 4. The remaining cost will be recovered in Year 5 i.e. full cost will be recovered in the Year 5. Therefore, Years before full recovery: 4 years Unrecovered cost at the start of the year: $400 (i.e. $4,800-$4,400) Cash flow during the year of full recovery: $1,100 (in year 5) Substituting these values in the Payback period formula, we get- Payback period=4+$400$1,100 =4+0.3636363Payback period=4.36 yearsFrom the cumulative cash flows column in the table, we can say that the cost of $8,800 out of the total cost is recovered in the year 8. But, the remaining cost cannot be recovered in the next year as there is no cash flow and therefore, there won't be full recovery of the cost. Hence, the payback period is 0 years.

Answered: An investment project provides cash…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

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An investment project provides cash inflows of $1,100 per year for eight years.

a.	What is the project payback period if the initial cost is $3,750? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.	What is the project payback period if the initial cost is $4,800? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c.	What is the project payback period if the initial cost is $9,800? (Enter 0 if the project never pays back. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)