Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1Year 2Year 3Year 4Year 5TotalNet cash flows $60,000 $40,000 $70,000 $125,000 $35,000 $330,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

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bridgittaruvinga bridgittaruvinga · Answer 1 · 2019-08-06T12:12:34+02:00

Answer:

Payback equals 3.08 years

Explanation:

Year Annual Cash-flow Cumulative cash-flow

0 ($180,000) ($180,000)

1 $60,000 ($120,000)

2 $40,000 ($80,000)

3 $70,000 ($10,000)

4 $125,000 $115,000

5 $35,000 $150,000

[tex]Payback period = A + \frac{B}{C}[/tex]

Where,

A is the last period number with a negative cumulative cash flow;

B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and

C is the total cash-inflow during the period following period A

therefore [tex]Payback period = 3 + \frac{10,000}{125,000}[/tex] = 3.08 years