Question

Zeta Gaming Company has an opportunity to purchase a video game phone app that will cost $150,000. Zeta expects the demand for the app to start strong but to diminish as people tire of the game. The expected cash inflows are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 $60,000 $50,000 $40,000 $30,000 $20,000 If Zeta uses the cumulative approach the payback period for this investment is

Answer 1

Answer:

Payback period for this invest = 3 years

Explanation:

According to the scenario, computation of the given data are as follows:

Cost = $150,000

So, cumulative cash flow can be calculated as follows:

Year                    Cash flows                    Cumulative cash flows

  0                      ($150,000)                            ($150,000 )

  1                        $60,000                              ($90,000 )

  2                        $50,000                              ($40,000 )

  3                        $40,000                              $0

  4                        $30,000                             -$30,000

  5                        $20,000                             -$50,000

As this shows in year 3 the cumulative cash flow becomes 0.

Hence, the payback period is 3 years.

= 3 years