Shirt Corporation is considering purchasing equipment that costs $60,000 and is expected to provide the following cash inflows over its five-year useful life: Year Cash Inflow 1 $18,000 2 $22,000 3 $24,000 4 $16,000 5 $ 9,000 Calculate the payback period for this investment.
Shirt Corporation is considering purchasing equipment that costs $60,000 and is expected to provide the following cash inflows over its five-year useful life: Year Cash Inflow 1 $18,000 2 $22,000 3 $24,000 4 $16,000 5 $ 9,000 Calculate the payback period for this investment.
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
Section: Chapter Questions
Problem 1PS
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Problem 6 - Shirt Corporation is considering purchasing equipment that costs $60,000 and is expected to provide
the following cash inflows over its five-year useful life:
|
Year |
|
|
1 |
$18,000 |
|
2 |
$22,000 |
|
3 |
$24,000 |
|
4 |
$16,000 |
|
5 |
$ 9,000 |
Calculate the payback period for this investment.
Expert Solution
Step 1 Concept
The Payback period is a period in which project return back the investment amount which is invested at the time of investment or initiating the project.
When equal annual cash inflow :
But in this question unequal annual cash flow is given therefore we will find the payback period by different method by calculating the cumulative cash inflow.
Step 2 Calculation of Pay Back Period (PBP)
| Year | Cash Flow | Cumulative CF |
| 0 | -60000.00 | -60000.00 |
| 1 | 18000.00 | -42000.00 |
| 2 | 22000.00 | -20000.00 |
| 3 | 24000.00 | 4000.00 |
| 4 | 16000.00 | 20000.00 |
| 5 | 9000.00 | 29000.00 |
Pay Back Period = [ 2 + (20000 / 24000) ]
Pay Back Period = 2.8333 Years
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