The selection of the investment in the product using pay-back period. Introduction: Pay-back period (PBP) : It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below: Pay-Back Period = Year + Initial Investment − Cumulative Cash Flow Cash FLow Where, Year = The year in which cumulative cash flow is near and less than the initial investment. Initial investment = The amount of the investment. Cumulative cash flow = The cumulative cash flow which is near and less than the initial investment. Cash flow = The cash flow of the next year from the â€œYearâ€� used for the calculation.

Question

The Fortune Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,000 Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500 Operating costs 3,100 3,200 3,300 2,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 340 390 440 340 ?

Answer 1

Question

Chapter 12, Problem 6P

Summary Introduction

To calculate: The selection of the investment in the product using pay-back period.

Introduction:

Pay-back period (PBP):

It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below:

Pay-Back Period=Year+Initial Investment−Cumulative Cash FlowCash FLow

Where,

Year = The year in which cumulative cash flow is near and less than the initial investment.

Initial investment = The amount of the investment.

Cumulative cash flow = The cumulative cash flow which is near and less than the initial investment.

Cash flow = The cash flow of the next year from the â€œYearâ€� used for the calculation.

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