Beyer
Company is considering the purchase of an asset for $250,000. It is
expected to produce the following net cash flows. The cash flows occur
evenly throughout each year.
| | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total |
| Net cash flows | | $ | 50,000 | | | $ | 36,000 | | | $ | 60,000 | | | $ | 130,000 | | | $ | 24,000 | | | $ | 300,000 | |
|
Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your payback period to 2 decimal places.)
| Annual Net
Cash Flows | Cumulative
Cash Flows |
| Year 1 | | $ | 50,000 | | | $ | -200,000 | |
| Year 2 | | | 36,000 | | | | -164,000 | |
| Year 3 | | | 60,000 | | | | -104,000 | |
| Year 4 | | | 130,000 | | | | 26,000 | |
| Year 5 | | | 24,000 | | | | 50,000 | |
|
| |
| Cost of investment | $ | 250,000 | |
| Paid back in years 1-3 | | -104,000 | |
| |
|
| |
| Paid back in year 4 | $ | 104,000 | |
| |
|
| |
|
| | Amount paid back in year 4 | | $104,000 | | |
| Part of year | = |
| = |
| = | 0.80 |
| | Net cash flow in year 4 | | $130,000 | | |
| Payback period = 3 + 0.80 = 3.80 years, (or nearly 3 years and 9 months) |
