Chapter 26, Problem 1QS

To determine

Introduction:

Payback period of any investment refers to the minimum expected time period which is required to recovery of initial investment. In other words we can say that minimum period in which initial investment will be recoverd is known as payback period.

To Calculate:

Payback period of the investment

Answer to Problem 1QS

Solution:

$\begin{array}{l}\text{Payback period = (Initial investment / Annual net cash inflow)}\\ \text{Payback period (\$27000 / \$9000)}\\ \text{Payback period = 3 years}\end{array}$

Explanation of Solution

Initial investment is given = $27000
Useful life of investment is given = 4 years
Annual cash inflows is given = $9000

Payback period of the investment will be calculated as follow;

$\begin{array}{l}\text{Payback period = (Initial investment / Annual net cash inflow)}\\ \text{Payback period (\$27000 / \$9000)}\\ \text{Payback period = 3 years}\end{array}$

Conclusion

Payback period of the investment is 3 Years.