**Understanding the Payback Period****Problem Statement:**Assume a project has the following expected cash flows. What is the payback period?**Cash Flow Table:**- **Year 0:** Expected Net Cash Flow = ($400,000)- **Year 1:** Expected Net Cash Flow = $100,000- **Year 2:** Expected Net Cash Flow = $150,000- **Year 3:** Expected Net Cash Flow = $200,000- **Year 4:** Expected Net Cash Flow = $250,000**Concept Explanation:**The payback period is the time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment. This calculation is crucial for assessing the risk and liquidity of an investment. The shorter the payback period, the quicker the project returns its initial investment.**Step-by-Step Calculation:**1. **Year 0:** Initial investment of $400,000 (outflow).2. **Year 1:** Cash inflow of $100,000. Total recovered: $100,000. Remaining: $300,000.3. **Year 2:** Cash inflow of $150,000. Total recovered: $250,000. Remaining: $150,000.4. **Year 3:** Cash inflow of $200,000. Total recovered: $450,000. (Investment recovered during this year).Thus, the payback period is between Year 2 and Year 3. Since $150,000 was remaining after Year 2, and Year 3 provided $200,000, the payback is achieved within the third year. Calculating more precisely:\[ \text{Fraction of Year} = \frac{\text{Remaining Amount}}{\text{Cash Flow in Year 3}} = \frac{150,000}{200,000} = 0.75 \]Therefore, the payback period is 2.75 years.

Cash Inflow :— It is the money received by business or come into business. Cash Outflow :— It is the money come out of business. Payback Period :— It is the number of period upto which initial investment is recovered. Working Note #1:— Year Cash Inflow Amount Left to recover cash outflow or initial Investment 1 100,000 400,000-100,000 = 300,000 2 150,000 300,000-150,000 = 150,000 This is Base Year Because Next year Cash inflow is greater than amount left to record cash outflow 3 200,000 4 250,000 Working Note #2:— Payback Period = Base Year + (Amount left to recovered cash inflow in base year/Cash inflow of year next to base year) = 2 + (150,000/200,000) = 2 + 0.75 = 2.75 YearsRequirement #:— Hence, Payback period is 2.75 years.

Answered: Assume a project has the following…

Business

Accounting

Assume a project has the following expected cash flows: What is the payback period? Year 0 1 2 3 4 Expected Net Cash Flow ($400,000) 100,000 150,000 200,000 250,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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